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Are investors correct in their optimism?
Given the uncertainty we’re facing this year, from inflation to interest rates to Covid, investors seem remarkably calm at the moment considering China is still embracing lockdowns.
Throw rising commodity prices into the mix and there are plenty of reasons to be bearish. But if you look at the financial markets, we don’t see that. Stocks are not far from record highs in many cases and the yield curve is not yet inverted enough to suggest a recession.
Instead, the Fed is warning of a very aggressive tightening cycle, telling us that the labor market is too strong and inflation will soon be under control. For once, the central bank and markets appear on one page. Which is probably making me more concerned than it should be.
US
The focus on Wall Street remains geopolitics, but many traders will be paying close attention to economic data on US jobs, consumers, inflation and manufacturing activity.
The Fed is confident that the economy is on solid footing despite rising inflation, but if economic data tells a different story, it could change the front-loaded approach to outsized rate hikes.
The non-farm payrolls report will confirm that the job market remains strong. Consensus estimate for March jobs added is 450k, down from February’s 678k gain. The unemployment rate is expected to fall to 3.7%, while average hourly wages could rise to 0.4%, an improvement from the flat reading a month ago.
I
It goes without saying that the focus next week will remain on what is happening in Eastern Europe and what the EU is doing to reduce its dependence on Russian energy and allow it to impose tougher sanctions. The latter is unlikely anytime soon, but the US LNG deal was a step in that direction.
The next week offers a wealth of economic data with flash inflation indicators standing out. Eurozone flash CPI on Friday will be monitored, but we could get clues from individual nations earlier in the week.
Central banks have been forced to withdraw their temporary message in recent months and the ECB took a step in that direction a few weeks ago. Any further unexpected spikes in inflation will add to the pressure and make comments from President Lagarde and her colleagues all the more interesting.
United Kingdom
Next week will be mostly Tier 2 and Tier 3 data from the UK, with a speech by BoE Governor Andrew Bailey on Monday as a highlight. The MPC last week gave the impression that it would ease its hawkish stance slightly after three consecutive rate hikes, but inflation has accelerated faster than expected over the past month, which could force it to hold out for a few more sessions. Lieutenant Governor Ben Broadbent will also speak on Wednesday.
Russia
Against the backdrop of Russia’s illegal invasion of Ukraine, Western sanctions and attempts by the Kremlin to hit back — for example, this week’s decision to insist on Russian gas purchases denominated in rubles — there will be little fuss over the unemployment and manufacturing data next week.
Negotiations with Ukraine continue but appear to be making little progress. Meanwhile, sanctions continue to be imposed and the EU is slowly cutting off energy links that will be harmful in the long run. In the near future, the economy is expected to fall into a two-year recession, with this year’s contraction being particularly sharp at up to 10%.
South Africa
The SARB hiked rates by 25 basis points this week, but two MPC members (out of five) voted in favor of a 50 basis point hike. The tightening cycle is likely to continue as inflation stays at the upper end of its 3-6% target range and pressures on commodities mount.
Turkey
Turkey faces a relatively quiet week, with the manufacturing PMI being the only release of note.
China
In the coming week, myriad forces will impact the Chinese markets. Evergrande (OTCPK:EGRNF) is back in the headlines as foreign bondholders run out of patience.
Covid-19 continues to spread across the mainland, increasing the risk of lockdowns affecting manufacturing and logistics. US authorities are less sympathetic to the scrutiny of US-listed Chinese companies than they are to the noise from China. Russian support, tacit or official, is a major risk point from a sanctions perspective.
China also releases its official and Caixin manufacturing and services PMIs.
All of this poses downside risk for Chinese stocks, which have quickly run out of breath after last week’s government support to support the market. China left its LPRs unchanged, disappointing participants who wanted to see concrete action.
India
India releases its trade balance on Friday, which could show the impact of higher oil prices. As a large net energy importer and given the central bank’s continued reluctance to hike rates, the INR remains at the weak end of its range. A sharp rise in oil prices or US yields next week could trigger further INR weakness which could also result in hot money exiting the Sensex.
Australia
The AUD/USD is trading close to recent highs on the back of a fresh rise in commodity prices and possible some safe-haven inflows, although risk sentiment remains better than last week. The jobs data was strong and the week ahead will be dominated by retail sales, private sector credit and manufacturing PMI. The AUD and local stocks will also be sensitive to the Chinese PMI prints.
There is a lot of good news built into AUD at these levels, which is also supported by AUDJPY buying. Weak data, a sharp turnaround in sentiment or weak PMIs in China could prompt an abrupt correction in the AUD, which could also be reflected in equity markets.
New Zealand
The New Zealand dollar has rallied sharply on commodity prices and port inflows as markets brace for faster RBNZ tightening. There is a lot of good news built into the price like AUDUSD and this makes the NZD vulnerable to a sharp correction lower.
Tuesday’s ANZ business confidence could provide that excuse as confidence plummets on the back of the Ukraine war and rising inflation.
Japan
USD/JPY is up 400 points over the past week as the US-Japan interest rate differential continued to widen. The BoJ and MoF have tried to calm them down with limited success. FX markets should now be on the lookout for further “watch FX closely” comments that could send the USDJPY sharply lower intraday in the coming weeks.
Japan has an extensive data calendar that includes unemployment, retail sales and arguably the most important industrial production as well as the Tankan Large Manufacturers Survey. The latter two provide a snapshot of whether the disruptions in Ukraine and the wave of inflation are affecting business. Low pressures could be headwinds for local equities.
Singapore
Inflation rose this week leading to a MAS tightening in April. However, local markets have been buoyant as Covid restrictions have been eased dramatically. The PPI has upside risk this week that could add to the MAS noise and weigh on stocks. USD/SGD remains content to continue with the USD/Asia package currently fully reliant on sentiment shifts in Ukraine.
economic calendar
Sunday March 27th
Economic Data/Events
Industrial profits in China
Monday, March 28th
Economic Data/Events
US wholesale stocks
President Biden will reveal budget proposal for 2023
Unemployment in South Africa
Mexico trade
Norges Bank Deputy Governor Borsum speaks to the bank’s regional network
UK Chancellor Sunak appears before the Finance Committee to discuss his spring statement
BOE Governor Bailey speaks about the economy at an event organized by European think tank Bruegel
Tuesday, March 29th
Economic Data/Events
US consumer confidence
The Australian Treasurer Frydenberg presents the annual budget
Harker, President of the Philadelphia Fed, discusses the economic outlook at an event hosted by the Center for Financial Stability in New York
Bank of England quarterly report
unemployment in Japan
Australia Retail Sales, Consumer Confidence
Mexico International Reserves
Wednesday March 30th
Economic Data/Events
Final US GDP for Q4
Consumer Price Index Germany
The Fed’s Barkin speaks at a conference hosted by his bank on investing in rural America
BOE Deputy Governor Broadbent speaking at The MPC at 25 conference.
British Prime Minister Johnson appears before the Liaison Committee
Unemployment in Russia
Mexico unemployment
New Zealand building permits, business confidence
Interest rate decision in Thailand: The interest rate is expected to remain unchanged at 0.50%
Retail sales in Japan
Eurozone economic confidence, consumer confidence
EIA Crude Oil Inventory Report
Thursday March 31st
Economic Data/Events
US Consumer Income, Initial Jobless Claims
OPEC and non-OPEC Ministerial Meetings on Output
Mächler and Moser from the SNB speak at a money market event in Zurich
Fed’s Williams makes keynote address at conference
Bank of Italy Governor Visco delivers an annual address on the state of the economy
CPI France and Italy
UK GDP
Czech Republic GDP
Japanese industrial production
South Africa’s trade balance
Eurozone and German unemployment:
China manufacturing PMI, non-manufacturing PMI
Australia job vacancies, building permits
India’s budget deficit, eight infrastructure industries, BoP
Thailand BoP
Beginning of Japanese housing construction
Singapore money supply
Friday April 1st
Economic Data/Events
US March Change in Nonfarm Payrolls: 450k vs 678k before, Construction Spending, Unemployment, ISM Manufacturing, Vehicle Sales
Virtual Europe-EU Summit with Chinese President Xi and Premier Li Keqiang as well as European Council President Michel and European Commission President von der Leyen
Eurozone Manufacturing PMI, CPI
Schnabel and Knot from the Eurozone ECB address an event in Cernobbio, Italy
Poland CPI
Germany manufacturing PMI
Manufacturing Purchasing Managers Index UK
House Prices in New Zealand, Consumer Confidence
Japan Vehicle Sales, PMI
Property prices in Singapore
Value of home loans in Australia, house prices
China Caixin Purchasing Managers Index
Thailand PMI, FX Reserves, Business Sentiment Index
Country rating updates
– Poland (S&P)
– Turkey (S&P)
– Italy (Moody’s)
– South Africa (Moody’s)
– France (DBRS)
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Publisher’s Note: The summary bullet points for this article were selected by Seeking Alpha editors.
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