Central banks playing catchup
There has been incredible resilience in equity markets in recent weeks as central banks have ramped up interest rate expectations, particularly at the Fed, and bond markets have at times priced in a recession. While there have been wobbles in stock markets, they’ve quickly recovered which suggests investors may not be buying the recession warnings.
Of course, all recessions aren’t equal and it’s possible that much lower growth in the near term is already priced in as a result of the multiple headwinds facing the economy. A mild recession probably wouldn’t drastically change anything as far as markets are concerned. Especially if central banks succeed in getting inflation under control again.
Considering their collective record over the last six months or so, there isn’t a huge amount of faith in central banks to fix the mess that is at least partly of their own doing. Perhaps they’ll surprise us all but that will probably mean some big rate hikes over the coming months as they hope to make up for lost time.
Right now the most important economic data release for the Fed is inflation data. Wall Street is buying the Fed’s hawkish turn and is pricing in rate hikes at every policy meeting for the rest of the year, with the next two policy decisions delivering super-sized rate hikes of 50-basis points. The latest inflation report is expected to show pricing pressures are intensifying, with the March reading showing an 8.4% gain from a year ago.
Inflation is widely expected to make a fresh four-decade high and that should justify expectations for a 50-basis rate hike at the May 4th FOMC policy meeting and the start of the balance sheet reduction. Other notable economic releases occur on Thursday and include retail sales and preliminary University of Michigan consumer sentiment reading. On Friday, the Empire manufacturing survey and industrial production data will be released.
It will be another week full of Fed speak, with Bostic, Bowman, Waller, and Evans speaking on Monday, before the latest inflation report. Brainard will be the first to speak after the release on Tuesday, while Barkin will speak later that night. Mester and Harker will both speak separately on Thursday.
The Ukraine invasion continues to dominate the outlook as far as Europe is concerned, with sanctions imposed coming at a greater cost than those from elsewhere, due to the closer trade ties. And with the low hanging fruit picked, further sanctions will be very damaging unless phased in over a long period of time which to a great extent undermines their impact.
The ECB meeting next week won’t see interest rates rising, as we’re seeing elsewhere, but we could see the tone shifting as the central bank comes to terms with much higher levels of inflation. The ECB became much more hawkish in March but if markets are to be believed, and they’ve very much have with other central banks over the last six months, there’s a lot further to go. We could get an indication that they’re heading that way next week although they may save any big announcements for June when they have fresh economic projections.
The French presidential election kicks off this weekend and the race between Emmanuel Macron and Marine Le Pen has become much closer in recent weeks. Once seen as unelectable, Le Pen is now a serious contender and the two are expected to progress to the second round, at which point some have the vote falling within the margin of error, meaning a victory is not assured for Macron. Many are pointing to Brexit and Trump as evidence that the once seemingly impossible can become very possible and Le Pen could be the next to be added to that list which may make some in Brussels very nervous. A strong showing this weekend could make traders nervous on the open next week.
A shortened week for the UK but we still get the usual data dump with GDP on Monday, jobs report on Tuesday and CPI inflation Wednesday. It’s obvious which is most important in the current environment, with the CPI data potentially telling us whether the BoE is correct to be already cooling its tightening talk. Considering how this has gone so far, I expect the data won’t make for good reading for the MPC.
Russia is facing the steepest recession since the fall of the Soviet Union but currency controls have worked in stabilising the rouble which enabled the CBR to cut rates by 3% on Friday. The Key Rate now stands at 17% and they warned it could be cut further which didn’t trouble the currency.
Further sanctions have been imposed but those that will really hurt continue to face resistance. No major economic events next week.
Tier two and three economic releases next week only.
Inflation rose to a 20 year high last month at 61% which would ordinarily give central bankers sleepless nights but those at the CBRT are no ordinary policymakers. We shouldn’t expect any rate hikes on Thursday, with the repo rate seen remaining at 14%. The monetary policy review will determine the next steps, whenever that is completed.
The ongoing lockdown of Shanghai is starting to unnerve markets around its impact on China’s growth and by default, the rest of Asia. Cases hit 24,000 on Friday and the evolution of this situation will be closely monitored over the weekend. A spread to other cities or a worsening in Shanghai will be a strong headwind on China’s equity markets this coming week.
That will overshadow China’s inflation on Monday which should still be benign as the PMIs indicated consumer confidence is fading. New loan growth, which has faded recently, and the House Price Index, have considerable downside risks and are a potential negative for equities across the region.
But markets will be watching for the latest 1-year Medium-Term Financing release this week. China has talked a big game on stimulus with no signs of concrete action. Markets are pricing in a 10 to 15 bps cut this week which could provide modest equity support. No move could be another equity headwind.
The PBOC has drained liquidity over the past week and kept USD/CNY fixings neutral after weakening them in the previous weeks. If they resume weakening the Yuan next week, offshore CNH will fade and regional Asian currencies could follow suit.
The Reserve Bank of India left its headline policy rate unchanged on Friday, but in a huge shift, reimposed a 50bps rate corridor and hiked the policy rate it lends to banks to 4.25%. Additionally, the RBI Governor stated that inflation will now take priority over maintaining growth, a major shift in policy direction. India equities seem to have priced the news in, but the change in stance by the RBI may cap equity gains and be supportive for the INR in the weeks ahead.
India continues to buy Russian commodities such as oil and coal. There are geopolitical risks associated with this from the Western powers and the fine line India is treading will be an ongoing negative risk to the INR and domestic markets.
Political instability in Sri Lanka and Pakistan should be closely monitored. Both governments face potentially disorderly collapses this week which could have a negative spillover into Indian markets.
India releases industrial production, manufacturing and most importantly, inflation midweek. The latter could heighten tightening risks around RBI policy and potentially be negative for equities.
The RBA changed the tone of its language from ultra-dovish at the policy decision in the past week. The ensuing AUD rally quickly ran out of steam as the US Dollar and US yields surged. The AUD is at risk of a much deeper downward correction in the coming week as it closes near support this week, with a lot of good news baked into its price on rate hikes and commodities.
Noise is increasing about softening property prices in Sydney and Melbourne and bank stocks may come under pressure in the week ahead.
Australia releases business confidence, consumer confidence and employment data this week. The latter on Thursday is arguably the most important having seriously outperformed in previous months. Fading confidence and employment gains will dampen sentiment in Australian markets and could increase the risk of a material correction lower by AUD and local equities. In the bigger picture, the Ukraine/Russia war will remain supportive of Australian assets via the commodity complex.
The RBNZ releases its latest interest rate decision on Wednesday, one of the most anticipated in recent years. Anything less than 50 bps could see NZD/USD take a serious bath and erode confidence further over the RBNZ’s management of the Covid economy. A 50 bps hike could be a signal of more to come and may keep NZD steady. Local equities may struggle as the RBNZ, perhaps one of the worst-performing central banks in the developed world rushes to play inflation catchup.
Softening house prices and voter anger around the cost of living increases may further erode equity market confidence. AUD/NZD could continue to outperform, but like AUD/USD, NZD/USD faces some heavy downside risks in the week ahead.
Japan releases its Tanken survey this week, along with bank lending and machinery orders data. The Tanken has downside risks that may weigh on Japanese equities.
USD/JPY remains at the mercy of the US/Japan rate differential which widened sharply in the past week as US yields rose and the BOJ successfully capped 10-year JGB rates. That has sharply reversed the USD/JPY sell-off and we are now back to 124.00 once again. USD/JPY could easily test 125.80 in the weeks ahead despite BOJ/MOF rhetoric. I expect no intervention until we near 140.00, but the rumours could see short-term spikes lower by AUD/JPY.
The MAS has announced that on April 14th it will hold its semiannual monetary policy meeting. The MAS has already telegraphed it will tighten policy by appreciating the SGD via the NEER, as well as increasing its appreciation slope. Although I expect this to occur, the language of the statement, if very hawkish still, could weigh on local equities. Conversely, if the MAS blinks, the SGD may fall while local equities find temporary respite.
Sunday, April 10
French presidential elections first-round results
Monday, April 11
China PPI, CPI
Fed’s Evans speaks on the economy and monetary policy at the Detroit Economic Club
EU foreign ministers meet in Luxembourg
Japan machine tool orders
Mexico industrial production
New Zealand card spending
South Africa manufacturing production
Turkey current account, unemployment rate
UK industrial production, services index, trade balance
Tuesday, April 12
US Mar CPI M/M: 1.2%e v 0.8% prior; Y/Y: 8.4%e v 7.9% prior, monthly budget statement
Fed’s Brainard speaks at the WSJ Jobs Summit
Fed’s Barkin speaks to Money Marketeers of NYU
Banks kick off earnings season
Australia consumer confidence, household spending
Germany CPI, ZEW survey expectations
India industrial production, CPI
Mexico international reserves
New Zealand central bank (RBNZ) rate decision: Expected to raise rates by 25bps to 1.25%
New Zealand net migration
South Korea money supply
Thailand forward contracts, foreign reserves
Turkey industrial production
UK jobless claims, unemployment
OPEC monthly oil market report
EIA crude oil inventory report
Wednesday, April 13
US PPI, MBA mortgage applications
Australia consumer confidence
Bank of Canada (BOC) rate decision: Expected to raise rates 50bps to 1.00%
China trade, medium-term lending facilities
Japan machinery orders, M2 money stock
Eurozone industrial production
Italy industrial production
New Zealand food prices, rate decision
South Africa retail sales
Thursday, April 14
US retail sales, initial jobless claims, business inventories, University of Michigan consumer sentiment
Fed’s Mester speaks at Ohio Economic Forum
Fed’s Harker speaks at Rider University
US bond markets close at 2pm EST
China property prices
ECB rate decision: No changed expected main refinancing rate, marginal lending facility, and deposit facility rate
New Zealand PMI
Australia unemployment, consumer inflation expectations
Singapore GDP, monetary policy statement
Turkey rate decision: One-week repo rate expected to remain unchanged at 14.00%
Friday, April 15
US Stock and Bond markets closed for Good Friday, UK markets also closed
US cross-border investment, Empire manufacturing, industrial production
China new home prices
No major sovereign rating updates expected
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