With a lack of an obvious catalyst this week, markets will continue to trade off the rate hikes from the FOMC and the BOE.
Last week, the FOMC hiked rates by 25bps and noted in its statement that there are more rate hikes to come, with Powell suggesting the possibility of a 50bps rate hike if needed. The BOE also hiked rates 25bps, however the statement noted that further modest tightening “might be appropriate”. These decisions will likely be impacted by the Russian/Ukraine war and its effect on commodity prices. Will growth slow significantly? Markets will get their first look at that answer when the Flash PMIs are released this week. In addition, markets will be watching for headlines from the Russian/Ukraine war. Negotiations seem to be at a standstill, but any hint of a ceasefire could drive risk higher.
The FOMC voted 8-1 to hike interest rates by 25bps last week to bring them to 0.50%. The last time the Fed hiked rates was 2018. In addition, both in the statement and the press conference, it was referenced that the Fed will begin unwinding the balance sheet at “an upcoming meeting”. Will this be the May meeting? In addition, the Fed’s “dot plots” showed that members expect 2022 inflation to be 4.3%, much higher than the forecast of 2.8% in December. As a result, members also revised their interest rate forecasts for year end. The median expectation is now 1.9%, which would imply 6 more rate hikes of 25bps by the end of the year. However, on Friday, the Fed’s Waller said that he would prefer to frontload interest rate hikes and would favor hiking 50bps at 1 or multiple meetings. Will other Fed members feel the same? Traders will be watching like hawks (no pun intended) for hints from Fed speakers this week.
In addition to the Fed hike, the BOE hiked rates by 25bps as well. However, the Bank of England had a slightly more dovish tone, despite expectations that inflation could rise to 8% by April. The statement said that global inflation pressure will strengthen considerably in the coming months. The central bank had previously forecasted peak inflation at 7.25%. As a result of expected higher costs, the BOE made a slight, but noticeable, dovish change to the statement. Previously, the statement read that further modest tightening is “likely to be appropriate”. The statement was changed to read that tightening “might be appropriate”. This implies that the uncertainties surrounding the higher energy costs may have an effect on household incomes. The UK releases February CPI data this week. Expectations are for a headline print of 5.9% YoY vs a 5.5% YoY print in January. Traders will be watching to see if inflation keenly. Note that the BOE has signaled that once rates reach 1%, it will begin unwinding the balance sheet more aggressively by selling bonds, as opposed to just not reinvesting proceeds.
Talks between Russia and Ukraine seem to be at an impasse as Russia continues its invasion into Ukraine. As of the time of this writing, the latest report from Russia’s Chief Negotiator are that the two countries are aligned on the issue of neutral status, however they are only halfway there on the issue of demilitarization. Just a day earlier, Zelensky set out a list of demands that must be met, which include security guarantees and sovereignty. A presidential advisor also said that Ukraine’s position is unchanged, and that the Ukraine borders must be recognized as there were as of 1991. This apparently has not been negotiated yet. Reports suggest that over 3 million people have fled Ukraine so far. What will this week hold for negotiations? Will Russia continue to bomb Ukrainian cities as talks continue this week? Watch the headlines for statements which can cause volatility!
The economic calendar is light this week, as March’s data is more spread out over the 31 days. In addition to the inflation data out of the UK this week, it will also be releasing retail sales. The other important data release this week will be the Flash PMIs from Australia, Eurozone, the UK and the US. This will be the first look at how well the manufacturing and service sectors held up after Russia invaded Ukraine and oil prices shot higher. Other important economic data to be released this week is as follows:
- New Zealand: Trade Balance (FEB)
- China: Loan Prime Rate 1Y
- Germany: PPI (FEB)
- New Zealand: Westpac Consumer Confidence (Q1)
- Australia: RBA Gov Lower Speech
- Canada: PPI (FEB)
- US: Richmond Fed Manufacturing Index (MAR)
- UK: Inflation Data (FEB)
- US: New Homes Sales (FEB)
- EU: Consumer Confidence Flash (MAR)
- Crude Inventories
- Global: Manufacturing and Services PMI Flashes (MAR)
- Japan: BOJ Monetary Policy Minutes
- Mexico: Mid-month Inflation Rate (MAR)
- US: Durable Goods (FEB)
- Mexico: Interest Rate Decision
- UK: Retail Sales (FEB)
- Germany: Ifo Business Climate (MAR)
- US: Pending Home Sales (FEB)
- US: Michigan Consumer Sentiment Final (MAR)
Chart of the Week: Weekly Nikkei 225 Index
Source: Tradingview, Stone X
The Nikkei 225 has put in its best week since March 2020, up 8.25% this week. The large cap index had moved higher off the March 2020 lows of 15,997 and made a high of 30,724 during the week of February 16th, 2021. After pulling back, the Nikkei tested those highs in September 2021, barely making a new high at 30,801.5. Since then, the index has been moving lower in a downward sloping channel. Last week, price tested the 38.2% Fibonacci retracement from the March 2020 lows to the September 2021 highs near 25,136.8 before the large bounce this week. Horizontal resistance sits just above current level near 27,380. Above there, price can move to the top downward sloping trendline of the channel near 28,800, then retest the highs at 30,801.5. Support is at the lows from 2 weeks ago at 24,497, which is also the bottom trendline of the channel. Below there, price can fall to a confluence of support at previous highs and the 50% retracement level from the recently mentioned timeframe between 23,459 and 23,739, and then the 61.8% Fibonacci retracement level near 21714.
With a lack of an obvious catalyst this week, markets will continue to trade off the rate hikes from the FOMC and the BOE. In addition, watch to headlines from the Russia/Ukraine war to see if a ceasefire agreement can be reach. Have a great weekend!