The Macro Outlook for w/c 7 February 2022

by Kim | Feb 7, 2022

Key themes for the week ahead – US CPI, speeches

It will be a quiet week on the data front as markets digest data and central bank decisions from the last few weeks.

Recap from last week

Central banks have been shifting to less accommodative monetary policy settings while noting the high degree of uncertainty in the outlook.

Last week, the BoE announced a second increase in the Bank Rate of 25bps (5-4 majority, with the minority of 4 preferring a 50bps increase). Further ‘modest increases will be appropriate’ if the economy develops as forecast. The BoE announced its intention to begin QT. It will only start the process of actively selling govt bonds once the Bank Rate reaches 1% and expects to fully unwind its corporate bond holdings by ceasing to reinvest maturing assets and a program of corporate bond sales. BoE Governor Bailey is also scheduled to speak this week.

The ECB statement implied ‘accommodative for longer’ but the press conference signaled a potential change in outlook. When asked, President Lagarde no longer ruled out a rate increase in 2022 – but did not confirm it either. Instead, she noted that the ‘situation has indeed changed’ referring to the two higher-than-expected inflation reports in Dec and Jan. In Dec, the ECB had signaled that it no longer considered that it was a low inflation environment and, at this meeting, further noted the upside risk to inflation. President Lagarde stated that ‘we are getting much closer to target’ on inflation. At the Mar meeting, the inflation projection will be revised and a more formal update to the outlook will likely be provided. The end of the Pandemic-era QE program (PEPP) was announced – with reinvestments to continue until at least the end of 2024. The ‘regular’ QE program (APP) stays in place, but with a schedule of tapered purchases through to Q4. ECB President Lagarde will give introductory remarks this week.

The RBA announced the end of its bond-buying program with no further purchases after 10 Feb. There was no change to interest rates. There was no further guidance on the path of rates, except that the Board is willing to be patient on how various factors affecting inflation continue to evolve. The Board noted that unique conditions have led to higher inflation – and these factors are expected to dissipate. Underlying inflation is only just in the target band for the first time in seven years and is too early to say that inflation is in the target band “sustainably so”. Governor Lowe’s speech the next day provided more context. The bank has an opportunity to be patient in acting on inflation (and rates) and achieve a historical milestone of the unemployment rate below 4%. When asked though, Governor Lowe hedged his bets and stated that it was plausible that rates could increase later in 2022, or they could not.

US payrolls last week recorded a strong upside surprise. Revisions resulted in a net gain in payrolls over the year of +217k. The annual revisions indicated more momentum in the US labour market than previously thought. Despite the strong Jan report, hours worked declined in the month highlighting some underlying weakness. The Jan ISM’s recorded slower momentum due to renewed disruptions, higher prices, and labour availability. There were more notable pockets of weakness at an industry level, especially in the services report.

The week ahead

US CPI for Jan is the main focus this week. Consumer price growth is expected to have accelerated further to 7.3% in Jan (from 7% in Dec). The month-on-month CPI growth is expected to remain at 0.5%.

This week, the US Treasury will auction and settle approx. $241bn in ST Bills, raising approx. $31bn in new money. The US Treasury will auction the 3yr and 10yr Note, and the 30yr Bond this week which will settle next week.

Approx. $19bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.

More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:

Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net.