The war in Ukraine intensified further this week and concerns mounted about the humanitarian situation in Ukraine and what the end game will be in Ukraine. Fighting around Europe’s largest nuclear plant that caused a fire to break out stoked fears over a possible nuclear accident. However, the fire was put out.
Financial markets have seen a further risk-off move throughout the week with especially European stocks taking a big hit. Euro Stoxx 50 has dropped 9% this week at the time of writing and are down 16% from the peak. German 10-year bond yields have dropped 30bp over the past 2-3 weeks and now trade around zero again. The USD and CHF have gained further on flight to safety and EUR/USD has also moved lower on overall EUR weakness as the euro area is most exposed to the economic fall-out from the war in Ukraine.
Commodity prices have surged with not least oil and gas prices accelerating higher. Brent oil hit USD118 this week before falling back to USD111 but it’s still a rise of 40% compared to late last year. Food and metals prices are also moving higher as Russia is a big exporter of wheat and many metals. Food prices also see spill-over from higher gas prices as it is an input in fertilizer production. The CRB food stuff index is up 20% over the past three months. Apart from being inflationary it also adds to vulnerabilities among emerging and developing countries on top of continued struggle with covid in some of these countries.
The crisis has led to renewed downside risks to global growth with Europe being most exposed. Inflation could rise even further on the commodity price surge, which in turn erodes purchasing power. Underlying inflation is also likely to move up due to second round effects on wage growth and higher inflation expectations.
The inflationary effect of the crisis is keeping central banks on a hiking path despite the risks to growth. Fed Chairman Jerome Powell this week said he supported a 25bp hike at the meeting on 16 March and that 50bp hikes could be necessary later in the year if inflation failed to come down as projected. A similar message was given from other Fed members. We also expect the ECB to still hike in December, which is in line with market pricing. Inflation for February released this week surprised to the upside again hitting 5.8% (consensus 5.6%).
Looking into next week, the war in Ukraine will remain the most important thing to follow. Among other things, focus is on a possible siege of Kyiv by Russian forces. Otherwise the ECB meeting will be key for not least fixed income markets. We expect ECB to formally put an end date to the APP programme (in September this year), due to the high inflation pressure, but fall short of giving a firm indication of a coming rate hike, see ECB Preview – Inflation forces normalisation process to continue, 3 March. The US releases CPI inflation for February, which will also be key to gauge current inflation pressures. The Fed’s blackout period starts Saturday so we’ll get no further comments after that ahead of the 16 March meeting. In China, the annual National People’s Congress begins tomorrow. It starts with read-out of the work report, which outlines policies for the coming year including a growth target. We expect a target of 5+% or 5½%.
