Global Economy & Markets, Weekly Roundup 15/03/22

The Fed is set to raise its policy rate by 25 basis points to 0.50%, as US inflation hit a 40-year high of 7.9% year-over-year 

Key Takeaways

The European Central Bank (ECB) revised its economic outlook, incorporating strong upside effects on 2022 inflation from higher energy prices, alongside more measured negative impacts on GDP growth (-0.5 pps to +3.7%), due to Russia’s invasion of Ukraine. 

Although Russia represents a limited fraction of global GDP (1.7%), it is a major producer of many commodities and thus, the respective supply-at-risk is substantial. In addition, the situation poses a risk for major disruptions also in the supply of commodities coming from Ukraine. 

The revised estimates for euro area average CPI inflation in 2022 range widely, from +5.1% in the baseline scenario, which incorporates a technical assumption for an average oil price of $93/barrel during the year, to +7.1%, depending on how the war and the sanctions against Russia evolve and on the respective repercussions for global trade. 

The ECB also judged that longer-term inflation expectations have anchored at its 2% target and that a stabilization at these levels over the medium term is increasingly likely. 

Net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) will cease at end-March, as planned, with a total stock of €1.7 trillion, with reinvestments continuing in full until at least the end of 2024. The ECB also revised its Asset Purchase Programme (APP). Net APP purchases will average circa €30 billion per month in Q2:2022, instead of a monthly average of €40 billion, according to the previous guidance. 

The calibration of net APP asset purchases in Q3:2022 will be data-dependent, suggesting that QE could end during that quarter. Such a development would open the door to interest rate hikes “some time after”. On the other hand, as the outlook has become very uncertain, the ECB retained the option to revise its schedule for net APP purchases. According to financial markets expectations, a cumulative increase of 30-basis points by end-2022 is currently being priced in.

In a wide array of commodities (industrial metals, energy, agricultural), volatility has increased significantly, with their international prices reaching record highs (e.g. aluminum, nickel, wheat) or approaching them, before easing in recent days. Oil prices briefly appeared (Brent: $139/barrel) in course to challenge their record nominal highs of 2008 (Brent: $146/barrel), having fallen later on, hovering close to the $100/barrel mark in Tuesday morning’s trading. 

A new round of Covid-related lockdowns in China and respective demand concerns, contributed to the easing of international prices of commodities. At the same time, Chinese bourses have entered the current week with sharp losses (MSCI China: -7.5% on Monday ⅼ -25% YtD).

Option-implied volatility for US Treasury bond yields (ICE MOVE Index) hit the 140s, its highest since the onset of the pandemic. The 10-year US Treasury yield reached +2.14% on Monday 14th and its Bund peer +0.35%, the highest since May 2019 & November 2018, respectively, due to, inter alia, solid inflation data (US CPI: +7.9% yoy). 

Attention is now turning to the meeting of the Federal Reserve. An increase in the federal funds rate by 25 bps to 0.50% for the first time since December 2018 is expected on March 16th.