Recession Risks Mounting
It’s been another week of significant volatility in financial markets, one in which European indices edged closer to bear market territory, oil prices hit a 10-year high around $120, and safe-haven gold came close to $2,000.
The Russian invasion of Ukraine and the severe sanctions imposed on it by the West have created enormous uncertainty in the markets and the global economy. Next week offers several different financial market events, but this will undoubtedly remain front and center.
With commodity prices soaring in response to the latest developments, the job of central banks has just gotten even harder. Faced with increased recession and inflation risks, policymakers will be forced into some difficult decisions in the coming months, starting with the ECB next week as it pivots away from the transitory narrative and towards tapering and rate hikes.
US
The last major economic data release before the Fed’s March 16th policy meeting is expected to show inflationary pressures are not slowing down at all. The February inflation report is expected to show prices rose 0.8% since January and almost 8% over the last 12 months.
Fed Chair Jerome Powell noted in his testimony to Congress that if inflation stays hot, the Fed could hike rates by 50 basis points at a monetary policy meeting. Inflation seems poised to worsen, and that could lead to a rapid withdrawal of accommodation by the Fed.
EU
It goes without saying that the focus next week remains on Ukraine and whether any progress has been made towards de-escalating the crisis. There’s little hope of significant progress after two meetings between delegations from Ukraine and Russia. The attacks seen late in the week, including one on the Zaporizhzhia nuclear plant, offer little hope that sanctions have deterred Putin.
The ECB meets next week, and we’re expecting to get confirmation of the hawkish shift that’s been so evident since the last meeting. New economic projections will allow for a change of tone. The question is how significant a change we’ll see. The end of net asset purchases in the coming months looks inevitable. But will they allude to rate hikes this year? Obviously, the situation in Ukraine complicates the outlook, which may result in some hesitation from the central bank.
UK
A quiet week is in store for the UK, with economic data largely tiers two and three. The only release of note will be GDP on Friday.
Russia
Western sanctions imposed on Russia in response to its invasion of Ukraine will have a crippling effect on the economy, and the record lows and excessive volatility we’ve seen in the ruble over the last week are reflective of that. Exports are already facing extreme complications due to the sanctions. Even those the West has sought to shield like oil. Since the sanctions were imposed, the stock market hasn’t opened, and those Russian companies that trade abroad have been pummelled. The stock market will remain closed until at least next Wednesday.
Against this backdrop, CPI and GDP data just don’t really matter at the moment. Inflation is about to skyrocket, and the economy fall into a terrible recession. Interest rates have been hiked from 9.5% to 20% in the last week, and further may be necessary as the CBR looks to stabilize the currency, having been restricted by sanctions against the central bank.
South Africa
GDP is the only data release of note next week, with a few other low-tier releases also due. This week, the rand has continued to slip against the dollar in risk-averse trade.
Turkey
Inflation rose to more than 54% last month as the country continues to suffer the consequences of poor monetary policy decisions. Higher commodity prices could compound those problems in the months ahead.
Unemployment data will be released next week.
China
China’s Two Sessions concludes tomorrow night. If markets interpret it as a slowing economy, a sharp drop in the 2022 GDP target could spark China’s equity selling on Monday. China stocks are finishing the week under pressure, particularly the tech heavyweights listed in Hong Kong.
CNY continues to trade strongly as the ex-Dollar component of the basket weakens. CNY and CNH continue to benefit from haven inflows.
India
No significant data.
However, as oil prices continue to skyrocket, India equities and the rupee have come under pressure; Indian markets have a high beta to imported energy.
Australia
The week features Westpac consumer confidence, ANZ job ads, and NAB Biz Conf. All should continue to outperform despite the heavy flooding in Eastern Australia. Equities have traded sideways but have mostly avoided Ukraine contagion, and the currency has, in fact, rallied. The massive global rally in commodities will heavily benefit Australia, and the AUD should remain robust next week.
New Zealand
NZ electronic retail spending, Business PMI, and food inflation will show an economy overheating and likely increase calls for fast RBNZ tightening. That will be a headwind for equities but may boost the currency, which is rallying on the commodity boom like the AUD.
Japan
Japan releases GDP, which should highlight a post-delta recovery after a tough Q3, but the data is too backward-looking to materially impact markets.
USD/JPY is range-bound between higher US yields supporting the cross and domestic repatriation flows capping it due to geopolitical events.