The most important market theme right now is Russia’s invasion of Ukraine. Security analysts increasingly suggest that Putin’s aim is to replace the Ukrainian government with a Russia-friendly government, which will secure that Ukraine will not become member of NATO, see FT. As expected, the invasion was met by relatively harsh sanctions by the West but the sanctions were not as tough as one could have imagined. Russia was not excluded from SWIFT and energy was overall excluded. After the sharp risk sell-off early morning Thursday, markets rebounded late Thursday and early Friday due to softer-than-anticipated sanctions. The situation is still uncertain and hard to predict and we cannot rule out tougher restrictions down the road, which means upside risks for both oil and gas prices as well as some metal and wheat prices. Oil prices rose to nearly 106 dollar per barrel but is now trading below 102. In FX space, RUB and Eastern European currencies like PLN have weakened while USD and CHF have benefitted. EUR/USD is trading below 1.12 at the time of writing. We will continue to monitor the situation closely. We discussed further in Research Russia – Russia launches a full attack on Ukraine, 24 February.
Besides the Ukraine-Russia conflict, the key driver for markets is tighter monetary policy, not least in the US. Investors have reduced their bets for a 50bp rate hike from 80% probability on 10 February to now around 25%, as investors believe the Fed will be more hesitant to tighten monetary policy under the current circumstances with elevated uncertainty. We would like to emphasise, however, that the Fed does not have a lot of room to manoeuvre, as inflation is already at the highest level in 40 years and commodity prices have risen further since the attack, adding on top of already high underlying inflation pressure. There is a lot of uncertainty about the economic impact from the war but we know it is inflationary from rising commodity prices.
We get one of the most important US data releases next week when the February jobs report is due out on Friday, although it is now of secondary importance. Jobs growth was very strong in January, as labour force participation picked up. We believe it is more important to look at the unemployment rate (as headline jobs growth depends on how many people are flowing into the labour force) and another move lower would mean a higher probability of the Fed hiking by 50bp in March despite the Russia-Ukraine war. Also look out for the Fed’s beige book.
In the euro area, we expect HICP inflation in February accelerated further to 5.9% y/y (HICP core inflation to 2.4% y/y). We discussed the euro area inflation outlook in Euro inflation notes: Cost-push inflation – the genie is out of the bottle, 23 February.
We expect the Reserve Bank of Australia to continue pushing against the very hawkish market pricing, especially following modest Q4 wage growth data.
There is still a lot of focus on global supply chain issues. We argue that they will slowly ease up over the summer, see Big Picture: Global Supply Chain issues to slowly ease up in summer, 21 February. Near-term there are risks of increasing pressure with factories closing down in Russia and Ukraine.
