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Jamie Jemmeson
March 28, 2022

Are Central Banks Changing the Script?

BoE meeting postponed

Last week markets remained in a holding pattern as they continued to decipher the impact of the ongoing conflict in Ukraine and the long-term impact on the global economy. Further sanctions were imposed on Russia, but it is hard to see any conclusion in sight.

Chancellor Sunak announced his Spring Statement (mini budget), where he mentioned a 5p per litre reduction in fuel duty and a substantial increase in the National Insurance threshold of £3,000. In the meantime, the Office of Budget Responsibility (OBR) downgraded the 2022 outlook substantially with GDP seen to increase 3.8% compared with 6.0% previously. For the following two years, forecasts are now 1.8% and 2.1% respectively. Given high inflation, the OBR also stated that real living standards are set to decline 2.3% for 2022/2023, the sharpest decline on record. UK inflation rose to a 30 year high as prices rose by 6.2%. Further evidence about a UK slowdown was evident as UK PMI business confidence data recorded a decline in the manufacturing index to a 13-month low, business confidence declined by the largest amount since the pandemic started, UK consumer confidence dipped to a 16-month low and finally, retail sales declined by 0.3% for February compared with expectations of a 0.5% increase.

Across the pond, Federal Reserve (Fed) Chair Jerome Powell opened the door for raising rates by more than 25-basis at upcoming policy meetings if required to tame rising inflation rates. The market is now pricing in around seven rate hikes of 25-basis points in the six meetings left in 2022, implying a 50-basis point move at some point. On Tuesday, St. Louis Fed President James Bullard added to his hawkish credentials by saying that “faster is better” when it comes to rate hikes. The hawkish comments saw US Treasury yields increase across the curve.

Will BoE Gov Bailey Turn Neutral or Dovish?

Following the confidence-sapping data last week, the market will keep a close eye on incoming data and comments from central banks to articulate whether they will be dialling back in the expectation for rate hikes this year. On Monday, Bank of England (BoE) Gov Bailey is due to speak about macroeconomics and financial stability at an online event hosted by Bruegel. Given the release of the recent budget and the OBR’s latest forecast, the market will be keen to understand his stance.

In terms of economic data, mortgage approvals and net lending on Tuesday will be interesting to decipher given the signposting of interest rates hikes historic and forward-looking we have seen recently. On Thursday, the final reading of Q4 GDP is set for release with no change expected to the 1% growth.

Will US Economic Data Reinforce Super Hike?

Last week, there were some solid signs from the Federal Open Market Committee (FOMC) members, including Chair Powell that suggested we could see a 50-basis point hike at the next meeting. The market will focus on economic data this week to articulate the probability of this event. The key highlight will be Friday’s March labour market report which will likely be seen as a key bellwether of potential inflationary pressures. Fed Chair Powell has described the labour market as ‘red hot’ and it is clear that the Fed is concerned that accelerating wage growth is adding to the inflationary pressures from high energy prices and supply bottlenecks. In addition, the Fed’s preferred inflation measure is forecast to show annual inflation rising to 6.5%, a 40-year high providing further confirmation that near term inflationary pressures remain concerning.

Given the current political and inflationary environment we live in, the market will also focus on forward-looking gauges such as the Conference Board’s consumer confidence measure on Tuesday for signs of potential downside risk for US growth in the future.

Eurozone Inflation to Continue to Soar

Comments from policymakers have been mixed of late with concerns over a potential recession given the high inflationary environment, problematic supply chain and confidence-sapping war in Ukraine. The European Central Bank (ECB) still seems to be vacillating over whether it is more concerned about growth or inflation.

The market will focus on inflation data this week as the March reading for Eurozone CPI inflation is due on Friday and is forecast to post another rise. Inflation is set to soar to 6.7% (from 5.8% in February), yet another new high for the single currency era.

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