Weekly Market Outlook: Amidst all the uncertainty surrounding the Russian-Ukrainian conflict, the week ahead is important for many economies, with several key economic reports to come. It’s a crucial week for Europeans as the ECB is likely to opt for flexibility by speeding up the tapering of its asset purchases and removing the link between the end of net purchases and the first interest rate hike. Meanwhile, the US inflation data, set to be announced on March 10, is another major event for markets as expecting inflation reach another multi-decades high.
EUR | ECB Monetary Policy Meeting
The European Central bank will make some tough decisions at its monetary policy meeting on Thursday, 10 March 2022. Russia’s raid on Ukraine has made economic forecasts considerably more uncertain, causing energy prices to spike sharply higher, implying that inflation will rise much more and stay higher for longer than the ECB initially expected.
The ECB will likely maintain a loose monetary policy indefinitely if increased uncertainty and higher oil prices consistently harm the Eurozone economy. The impact of this is uncertain, and many Governing Council members have become quite concerned about the inflation situation. Despite the risks of another delay, most Governing Council members indicated that the normalization of ECB policy remains the intended direction even after the Russian attack.
The financial markets have also been unable to make up their minds. A slump in real yields indicates a deteriorating economy. Meanwhile, inflation expectations for 2023 and 2024 have jumped and are now clearly above the ECB’s target of 2%. Therefore, the market is pricing in rising risks of stagflation – a weak economy and high inflation. Meanwhile, lending conditions remain unchanged since the Russian attack despite earlier signals from the ECB that it would tighten policies.
USD | Inflation to Support Six Rate Hikes this Year
In spite of the Russian-Ukrainian war, resulting in higher commodity prices, supply and freight disruptions, and general anxiety about escalating conflict, the Federal Reserve has signaled confidence in the US economy.
Fed Chairman Jerome Powell, along with other FOMC members, has strongly backed the case for a 25bp rate rise on 16 March, stating the economy is fundamentally sound. While the economy is growing strongly, unemployment is down at 4% and inflation is at 40-year highs, interest rates should not be near zero, he said. And they are fully in favor of raising rates on 16th March, with further increases to follow.
CPI characterizes inflation dynamics. Its growth may have a positive effect on dollar quotes.
Despite Powell’s assertion that the Fed needs to be “nimble” in the face of uncertainties, markets are pricing in six 25bp rate increases for the year. This week’s strong inflation report will likely reinforce that view. We expect the CPI to rise by 7.9% this year, but a reading of 8% is certainly possible, which would mark the fastest rate of inflation since January 1981.
The NFIB survey will also be heavily focused on the topic of inflation. According to the survey, a record proportion of companies increased their prices last month – the survey has been conducted since 1968. Markets are expected to remain on edge about the prospect of sharply higher interest rates because of the depth and breadth of price pressures.
CAD | Employment Numbers in the Spotlight
As the economy has recovered all the output and jobs lost to the pandemic and inflation is at a 30-year high, the market is poised for a series of rate increases, so it was no surprise to the market when the Bank of Canada raised interest rates by 0.25% last week. The focus will now be on the February employment numbers.
In January, with some more restrictions imposed because of Omicron-related lockdowns, employment numbers fell 83,000. But for February, we are expecting to see a decent rebound and a drop in unemployment to 6.2%, which must be a positive sign for the Canadian Dollar. Due to Canada’s position as a major commodity producer and its limited trade and financial links with Russia, higher prices are expected to boost investment in the sector. The Bank of Canada will probably increase rates by five more 25bp this year.
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