The Macro Outlook for w/c 7 March 2022

by Kim | Mar 7, 2022

Key themes for the week ahead – Geopolitical risk, ECB policy meeting, US CPI

Recap from last week

The significant humanitarian toll and the economic and political fallout from the invasion of Ukraine continued to roil markets. Against the backdrop of surging commodity and energy prices, US Fed Chair Powell, in his testimony to the US Congress, confirmed that a 25bps increase for Mar “would be appropriate”. The plan to reduce the Fed balance sheet will not be finalized next week. After the Mar FOMC meeting, the Fed will “proceed carefully”. Inflation is too high, but the path and impact of sanctions are highly uncertain. Chair Powell signaled a path of stability over creating further uncertainty. The FOMC is now in the blackout period before next week’s meeting.

The target rate probabilities no longer reflect a more hawkish response from the FOMC in Mar. At the time of writing, markets were even pricing an 8% probability of no change to the FFR at next week’s meeting (a huge turnaround in market sentiment).

US data last week was strong. Non-farm payrolls and the household employment survey for Feb were stronger than expected. The US ISM surveys for manufacturing and services reflected a more constant pace of expansion during Feb.

The week ahead

The context for this week remains the ongoing and heightened geopolitical risk. Sanctions and the threat of embargos are having a significant impact on the supply and price of important food/ag commodities, industrial metals, and of course energy. If not contained quickly, this could exacerbate inflation problems, diminish the growth outlook, and will have a significant human toll.

The ECB will meet this week on policy. The ECB was expected to present a more thorough assessment of the inflation backdrop and forecasts at this meeting. But this will be a crucial meeting to understand how the ECB is changing its outlook in the context of the conflict – and it will be too early for the ECB to fully incorporate likely implications. Europe is facing even greater uncertainty with a war on its doorstep, financial market instability, and a potentially significant energy price shock.

The other important data point this week is US CPI for Feb and inflation is expected to stay extremely elevated. Headline CPI is expected to increase by +7.9% in Feb (up from +7.5% in Jan). The monthly pace of growth is also expected to accelerate to +0.8% (up from +0.6% in Jan). Political pressure on the Fed to rein in inflation has been building for some time now. At the Senate hearing last week Chair Powell was asked whether “the Fed was prepared to do what it takes to get inflation under control and protect price stability?”. Chair Powell responded, “…I hope history will record that the answer to your question is yes”. But the FOMC is not likely to enact measures that might disrupt markets right now.

This week, the US Treasury will auction and settle approx. $226bn in ST Bills with a net paydown of $69bn.

Approx. $17bn in ST Bills will mature on the Fed balance sheet this week and will be rolled over.

The US Treasury will also auction the 3-year and 10-year Note and the 30-year Bond this week – and will settle next week.

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