Macroeconomics: The Day Ahead for 7 March

Once again an array of normally significant data – China Trade and German Orders above all – are rendered irrelevant, as the threat of a US embargo on Russian energy imports sends asset markets into a capitulative risk off tailspin, while commodity and energy prices soar, even if the self-sanctioning moves by many oil majors were already an embargo in effect terms. While talk of a renewal of the Iran JCPOA deal being close for a few weeks, above all trumpeted by Russia in the past week, semi-official media soruces in Iran are now criticizing Russian ‘interference’ in the negotiations. In what can only be described as a rather desperate move, US officials have also been dispatched to Venezuela, presumably to try and negotiate on oil supplies, even though Venezuela reamins sanctioned itself, and is in any case in no position to fill any gaps (in the short-term) given the catastrophic state of its oil sector. Be that as it may, the question now is the extent of the domino effect in markets more broadly from this capitulation, with volatility and very poor liquidity raising the risks of dislocations and seizures, and by extension placing even more focus on the potential for further money market disruptions. Unsurprisingly money market futures are discountin less policy tightening for 2022, and a sharp easing reversal in 2023.

RECAP: The Week Ahead – Preview: 

  Once again, the week’s busy schedule of data and events is rendered largely moot by the escalating but also increasingly entrenched war in Ukraine. That said inflation readings out of the US (seen at 0.8% m/m 7.9% y/y headline and 0.5% m/m 6.4% y/y core) and China (PPI seen at 8.6% y/y vs. prior 9.1% and CPI unchanged at 0.9% y/y) and to a much lesser extent Brazil and Mexico offer baselines to attempt to gauge the impact of the surge in commodity and energy in prices over the past 10 days. Before offering some further observations on the war in the Ukraine, a quick summary of other data and events.

  The ECB has the unenviable task of being the first major central bank to present its policy update on Thursday, and is expected to push back somewhat on policy tightening expectations, emphasizing downside risks to the growth outlook, while conceding upside risks to inflation from the surge in commodity prices and widescale disruption to supply lines. It will be interesting to see if Frau Schnabel is co-opted into the press conference in the context of the collateral squeezes in Eurozone money markets, given that she is the ECB board member responsible for Market Operations, Research, and Statistics. Lagarde & co will also face some testing questions about sticking to a dovish policy line in the face of increasing EUR weakness. As with most major central banks, it is a case of ‘damned if they do (tighten policy), and damned if they dont’t’. Elsewhere, Poland’s NBP is expected to hike rates a further 50 bps to 3.25%, Hungary’s MNB to hike its one week Depo Rate 65 bps to 6.0%, and Peru’s BCRP to hike 50 bps to 4.0%.

  Statistically in addition to the aforementioned inflation data, two surveys will offer a first glimpse into public reaction to the war: Eurozone Sentix Investor Confidence and US March Michigan Sentiment. The US also has NFIB Small Business Optimism, JOLTS Job Openings, Trade and Treasury Budget. China will also see Trade data and Monetary and Credit Aggregates, while the UK awaits monthly GDP and associated activity data, BRC Retail Sales and RICS House Price Balance. Japan looks to Labour Cash Earnings, Household Spending, Q1 BSI and Economy Watchers survey. German has Factory Orders, Industrial Production, Retail Sales and WPI, with Unemployment due in Canada.

  A busy week for key supply and demand reports in the commodity/energy complex features US EIA Short-Term Energy Outlook and USDA’s WASDE, with China publishing its CASDE report hot on the heels of President Xi observing that “we must not think the problem of food is not as essential as entering into industrialization, and must not rely on the international market” ahead of the week long annual National People’s Congress (parliament) session. The US CERA Week energy conference and Bursa Malaysia’s Palm Oil conference will also attract attention. Government bond supply is plentiful both in the US, Eurozone and Japan, while the run of corporate earnings is modest as is typical for this stage of the quarter.

  Observations (in no particular order)

  – It is a fact that whenever oil prices have risen by 50% in the past, recession has followed, and unlike in the 1970s, there is no cheaper alternative to switch to, or back to (e.g. gas or coal), only compounds that pressure. To be sure, it should help to speed up in renewables, but the infrastructure that is needed will take considerable time to build, requires utilization of an array of raw materials that are also expensive on any historical comparison, and in some cases still require quantum leaps in both technology (e.g. storage) and upscaling of capacity.

  – Leaving aside the official imposition of energy sanctions on Russia, there are already a large number of companies in the energy and many other sectors that are now ‘self-sanctioning’, i.e. halting all business with Russia, which will have a) devastating effects on the Russian economy; b) leaves many questions about whether there is capacity elsewhere to compensate for this loss of supply (oil, gas, fertiliser, grains, oilseeds, copper and palladium are just a few of these); c) may already lead start to result in involuntary inventory accumulation in some finished goods, but above all even more acute problems for the semiconductor sector, and per se auto and mobile phone makers.

  – Grains: to reiterate a point from last week, the scale of the disruption to wheat supplies from Russia and Ukraine will hit North African and Levant countries, which were already struggling with the high prices prior to the outbreak of war, with for example Russia and Ukraine typically accounting for around 70% of Egypt’s wheat imports. Food price protests in these countries are a matter of how soon, and not if.

  – While China’s National People’s Congress is generally nothing more than a rubber stamping exercise for policy decisions taken by the politburo, China finds itself walking a very skinny tightrope between not wanting to overtly criticize Russia and looking after its own interests, which may currently be quite well served by absorbing some of Russia’s excess supply of oil, gas, raw materials and food commodities at heavily discounted prices (e.g. Urals oil trading at a $20+ discount to Brent). That said China’s banks have flagged that they are increasingly wary of financing trade with Russia. But it has to be added that the closer ties between China and Russia, above all in the past decade, have largely been a case of opportunism on both sides, and as has been long been observed they are anything but natural allies. China has much to lose in terms of trade with the EU and USA and the rest of the world, and will be more than well aware that measures that will be taken to finally wean Europe off its chronic dependency on Russia energy imports will only speed up the extant trend to de-globalization. China’s leadership will also be wary that pre-conflict perceptions elsewhere in the world (and at home) that the West was weak and divided, while Putin was strong, may well flip if this turns into a much longer confrontation, as seems increasingly likely, and more especially as it might undermine its own authority by association.

  – As observed on Friday, excess central bank liquidity and post-GFC regulation have only served to exacerbate current volatility, though thus far the high level of leverage has been partially unwound and as yet has not resulted in any severe dislocations, as was to some extent evident in the relatively high volume of investment grade corporate issuance last week, and despite obvious signs of some collateral shortages. But these are early days, and the likely persistence of volatility. There remains a very open question as to whether markets have sufficiently discounted supply disruption risks, or are setting themselves up for a harsh correction.

  – While all sources of information in regard to what is currently happening should be treated with immense caution, this Twitter thread of a translated analysis of the current situation in Russia by an active FSB analyst is worth reading: https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Ftwitter.com%2Figorsushko%2Fstatus%2F1500301348780199937&data=04%7C01%7CSimrat.Sounthe%40admisi.com%7C8ab4a93b45284c3b465a08da0017cf05%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637822399918817698%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=KdlTNiInOxC7%2BPruTbsYSGoIiaKm%2B1S8ueR%2Bfx%2FtqwU%3D&reserved=0

  As noted, it will be a light week for earnings, with Bloomberg News highlighting the following as likely to be among the highlights: Adidas, AIA Group, Ashtead Group, Chocoladefabriken Lindt & Spruengli, Crowdstrike, Deutsche Post, EssilorLuxottica, Franco-Nevada, Fubon Financial Holding, Hapag-Lloyd, JD, MongoDB, MTR, Ping An Bank, Prudential, Rivian Automotive.