A Preview Of The Crazy Week Ahead
Here is just a sample of the events on deck this week: a Fed rate hike, a Russian default, a meeting between the US and China, even more sanctions against Russia, the first double-digit (10%) PPI print in decades, a big drop in retail sales, a freak surge in covid across China, oh and a $3.3 trillion notional option expiration on Friday and all happening with liquidity at record lows. Yes, this week will be insane.
As DB’s Jim Reid summarizes what’s coming, it’s a big central bank week with the Fed the obvious focal point mid-week. The BoE and the BoJ also hold meetings, along with some of their emerging markets counterparts. We’ll also see CPI for Japan and Canada and a number of housing market statistics in the US and China. Earnings will include Volkswagen, FedEx and Enel, among others.
Wednesday will also be a landmark day even outside of the Fed as this is the date that two Russian Eurobonds have coupon payments. These are small (c.$120bn out of c.$1.75bn of annual hard currency coupons) but will be hugely symbolic. DB strategists write over the weekend that this would likely mark the start of the 30-day grace period that issuers have before a default is officially triggered. 30-days still gives time for there to be a negotiated end to the war and therefore this probably isn’t yet the moment where we see where the full stresses in the financial system might reside. There has already been a huge mark to market loss already anyway with news coming through or write downs. However this is clearly an important story to watch.
Onto the Fed now and the FOMC concludes on Wednesday, with the Fed expected to raise rates for the first time since December 2018. Markets are pricing in a +25bps hike, in line with the rhetoric from Chair Powell at his congressional testimonies a couple of weeks back. Before the invasion we thought a 50bps was likely this week and the problem is that by delaying such a move they may have to do more later. The market seems to agree to some degree as at Friday’s close the market was pricing in 6.7 hikes this year, the most seen in this cycle and above the post invasion intra-day lows of 4.45. This morning we are at 6.92.
Goldman agrees, and does not expect the war to knock the Fed off of a 25bp-per-meeting tightening path. With inflation likely to remain uncomfortably high all year, the FOMC will probably only pause if it thinks further tightening risks pushing the economy into recession. They continue to expect seven 25bp hikes this year, followed by four quarterly hikes in 2023, for a terminal rate of 2.75-3%.
The dots are likely to jump again in March, though the FOMC’s forecast is expected to be a bit less hawkish than our own. Goldman expects the median dot to show six hikes in 2022, but the risks are tilted to the downside, especially if FOMC participants view balance sheet reduction as equivalent to multiple rate hikes. The median dot is expected to show four more hikes in 2023 and a terminal rate of 2.5-2.75%, just above the FOMC’s 2.5% neutral rate estimate.
With regards to QT, strategists anticipate that the Fed will use this upcoming meeting to announce caps determining the maximum monthly runoff and, in May, announce QT that would begin in June. They think we will see $800bn of runoff this year and an additional $1.1tn drawdown in 2023, a cumulative reduction which is roughly equal to between three and four rate increases. The fascinating thing is what this does to the yield curve if they are correct: nirvana for the Fed is getting to around neutral, somewhere with a 2 handle on Fed Funds and trying to ensure that 10yr yields rise enough to prevent inversion but not enough to lead to a tightening of financial conditions. So if in 12-18 months time 2 year yields are 2.25-2.5%, 10 year yields are 2.75-3% and inflation is coming back towards trend then the Fed have pulled off a masterstroke. If however, 2yr yields are above 2% and 10yr yields below this level, the inversion will likely bite. On the other hand, if the curve steepens up too much and longer end yields are notably above 3% the risk is that financial conditions tighten too much given the global debt load. So, as Reid concludes, “the Fed are trying to thread a needle and its possible inflation will give them an impossible task.” Time will tell.
Ahead of the Fed watch out for US PPI (Tuesday) and Retail Sales (Wednesday). They are highly unlikely to change the equation for this FOMC but will be important for the direction of the economy and inflation thereafter. We also get a plethora of US housing data to end the week with Thursday’s housing starts and Friday’s existing homes sales. These are going to be important for both activity and the rents component in CPI.
Back to central banks and on Thursday, it will be the BoE’s turn. DB economists expect a +25bps hike to 0.75%, the pre-pandemic level. Their projected terminal rate is 1.75%. Finally, on Friday, the Bank of Japan will hold a meeting as well and is expected to hold the key rate steady but there is a chance of economic assessment being downgraded. The Bank of Russia’s decision on the same day will be scrutinized for the response to risks to the economy from the ongoing geopolitical turmoil.
Last, and certainly not least, on Friday we see a massive $3.3tln of derivative notional expiring, not only right after the FOMC decision but also in the midst of a complex geopolitical situation.
This represents some 30% of S&P open interest expires on March 18 (full preview of this week’s Op-Ex can be found here).
Courtesy of DB, here is a day-by-day calendar of events:
Monday March 14
- Data: France trade balance
- Other: annual review of the “shopping basket” in the UK
Tuesday March 15
- Data: US PPI, China property investment, industrial production, fixed assets ex. rural, retail sales, Germany ZEW survey expectations, UK jobless claims change, ILO unemployment rate 3 months, Eurozone ZEW survey expectations, industrial production, Japan trade balance, Canada housing starts, manufacturing sales
- Earnings: Volkswagen, RWE, Generali
Wednesday March 16
- Data: US retail sales, import price index, export price index, business inventories, NAHB Housing Market Index, China new home prices, Japan capacity utilization, core machine orders, Canada CPI, wholesale trade sales
- Central banks: Fed decision
- Earnings: Lennar, E.ON, Inditex
- Other: NATO defense ministers meet
Thursday March 17
- Data: US housing starts, building permits, initial jobless claims, industrial production, capacity utilisation, Japan CPI
- Central banks: BoE meeting, ECB’s Lagarde, Lane, Schnabel, Visco speak
- Earnings: Accenture, Enel, FedEx, Dollar General, Verbund
Friday March 18
- Data: US existing home sales, leading index, Italy trade balance, Eurozone trade balance, labour costs, Canada retail sales
- Central Banks: BoJ meeting, Bank of Russia meeting
- Earnings: Vonovia
Finally, when looking at just US macro data, Goldman writes that the key economic data releases this week are PPI inflation on Tuesday, retail sales on Wednesday, and Philly Fed manufacturing index on Thursday. The March FOMC meeting is this week, with the release of the statement at 2:00 PM ET on Wednesday, followed by Chair Powell’s press conference at 2:30 PM. There are several scheduled speaking engagements by Fed officials this week.
Monday, March 14
- There are no major economic releases scheduled.
Tuesday, March 15
- 08:30 AM PPI final demand, February (GS +1.0%, consensus +0.9%, last +1.0%); PPI ex-food and energy, February (GS +0.7%, consensus +0.6%, last +0.8%); PPI ex-food, energy, and trade, February (GS +0.7%, consensus +0.6%, last +0.9%): We estimate a 0.7% increase for PPI ex-food and energy and PPI ex-food and energy, and trade, reflecting a continued boost from supply chain bottlenecks, labor shortages, and commodity prices. We estimate that headline PPI increased by 1.0% in February.
- 08:30 AM Empire State manufacturing survey, March (consensus +7.0, last +3.1)
Wednesday, March 16
- 08:30 AM Retail sales, February (GS -0.5%, consensus +0.4%, last +3.8%); Retail sales ex-auto, February (GS flat, consensus +0.9%, last +3.3%); Retail sales ex-auto & gas, February (GS -0.3%, consensus +0.4%, last +3.8%); Core retail sales, February (GS -0.6%, consensus +0.3%, last +4.8%): We estimate a 0.6% decline in February core retail sales (ex-autos, gasoline, and building materials; mom sa). January sales were likely boosted by a low seasonal hurdle and by late shipments of some holiday orders, and we look for normalization in February—including in the nonstore category. The lapse of the child tax credit could also weigh on spending in this week’s report. On the positive side, we expect a rebound in restaurant spending as the Omicron wave subsided. We estimate a 0.5% decline in headline retail sales, reflecting lower auto sales but higher gasoline prices.
- 08:30 AM Import price index, February (consensus +1.6%, last +2.0%)
- 10:00 AM Business inventories, January (consensus +1.1%, last +2.1%)
- 10:00 AM NAHB housing market index, March (consensus 81, last 82)
- 02:00 PM FOMC statement, March 15-16 meeting: This week’s meeting will be watched mostly for clues about the pace of tightening after March in the statement, the dot plot, and the Chair’s comments about the war. We continue to seven 25bp hikes this year, followed by four quarterly hikes in 2023, for a terminal rate of 2.75-3%. We expect the FOMC will finalize and publish its balance sheet plan at the May meeting and then announce the start of balance sheet reduction at the June meeting.
Thursday, March 17
- 08:30 AM Initial jobless claims, week ended March 12 (GS 210k, consensus 220k, last 227k); Continuing jobless claims, week ended March 5 (consensus 1,480k, last 1,494k); We estimate initial jobless claims fell to 210k in the week ended March 12.
- 08:30 AM Philadelphia Fed manufacturing index, March (GS 10.0, consensus 15.0, last 16.0): We estimate that the Philadelphia Fed manufacturing index declined by 6.0pt to 10.0 in March, reflecting a sentiment drag from the conflict in Ukraine.
- 08:30 AM Housing starts, February (GS +5.0%, consensus +3.8%, last -4.1%); Building permits, February (consensus -2.4%, last revised +0.5%): We estimate housing starts increased by 5.0% in February. Our forecast incorporates higher permits, a smaller virus drag, and mean reversion after a decline in January.
- 09:15 AM Industrial production, February (GS +0.1%, consensus +0.5%, last +1.4%); Manufacturing production, February (GS +0.6%, consensus +1.0%, last +0.2%): Capacity utilization, February (GS 77.6%, consensus 77.9%, last 77.6%): We estimate industrial production rose by 0.1% in February, with strong mining production offsetting weaker auto production. We estimate capacity utilization was flat at 77.6%.
Friday, March 18
- 10:00 AM Existing home sales, February (GS -5.0%, consensus -6.2%, last +6.7%); We estimate that existing home sales decreased by 5.0% in February, following a 6.7% increase in January.
- 01:20 PM Richmond Fed President Barkin (FOMC non-voter) speaks: Richmond Fed President Thomas Barkin will discuss the economic outlook during an event hosted by the Maryland Bankers Association. Text and Q&A with both audience and media are expected.
- 02:00 PM Fed Governor Bowman (FOMC voter) speaks: Fed Governor Michelle Bowman will take part in a virtual Fed Listens event on “Helping Youth Thrive”.
Source: DB, Goldman, BofA