The continuing impact on markets of Russia’s invasion of Ukraine will again be the major focus this week for wary investors who will also have to keep a close eye on the US Federal Reserve rate rise early Thursday, Sydney time, and then fresh US inflation data for February a day later.
That will all make for another fraught week for markets.
As well there’s the impact on all markets from the Russian invasion and assaults in Ukraine (helped by the tightening Western sanctions on Russia) – especially the price of key commodities such as energy which carry with them further upward pressure on costs and prices across all parts of the global economy.
After the dramatic impact of the Western sanctions, Russia is heading for a deep and prolonged recession while Putin has ensured Ukraine suffers from a terrible depression of the sort rarely seen outside Syria and parts of the Balkans in the 1990’s wars.
Normally the week would be dominated by the monetary policy meeting of the US Federal Reserve but even that body will be reacting to what is happening in Ukraine and the fallout on markets, prices, demand and economic activity generally.
There are no real positives in the spillover into markets – except for some short-term gains by commodity producers such as Australia and Canada and major resource companies in those two and other economies.
This week’s two-day Fed meeting will lift US interest rates by 0.25% but the acceptance of that rise by investors has been completely overshadowed by the brutal events in Ukraine as Russian forces proposed then broke a small humanitarian ceasefire at the weekend.
That was after stocks sold off in volatile trading last week with a big drop Friday, as oil rose more than 20% and a whole host of other commodity prices surged higher on supply worries. Investors sought safety in bonds, driving yields lower and currencies like the US and Australian dollars higher.
Gold and silver futures prices also rose sharply – gold by more than 4% over the week as it heads back to the $US2,000 an ounce level it was at back in August, 2020.
Apart from Ukraine and the Fed meeting, the rest of the economic calendar around the globe (thankfully) looks light this week, with the exception of Chinese trade data for combined January and February later today and then the latest inflation data later in the week.
US consumer price inflation is forecast to show another sharp rise (and there will be one for March in a month’s time because of surging energy prices)
According to market forecasts economists expect headline inflation to rise to 7.8% year-over-year, from 7.5% in January, the highest since 1982.
Headline inflation includes food and energy prices. Core inflation is expected to rise from January’s very high 6% annual rate.
Thursday also sees the European Central Bank meet in the midst of the war in Ukraine, the growing impact of the Western sanctions on Russia (and its mate, Belarus) and the potentially multi-billion dollar in losses that this will bring to banks, companies of all types, especially energy groups.
Chinese trade data today for January and February will be closely examined to see if China maintained commodity imports at their relatively high levels in November and December (to stock up ahead of the New Year holiday break) or if they fell as they usually do post that break.
Volumes and prices will be closely examined as well for signs of the explosion in prices in late February feeding through into the value of imports in particular.
Wednesday’s CPI inflation remaining low at 0.8% year on year, according to the AMP’s chief economist, Shane Oliver and producer price inflation slowing further to 8.6%y year on year. That will be a long way from the 3% target for this year that was not met in 2021.
Credit data for February will be out later in the week and will watched for a further acceleration in credit growth following recent policy easing measures.
Car sales on Friday will likewise be closely watched for impact of cuts in the purchase subsidies for so-called New Energy Vehicles – January showed an 18% fall from December’s record high of 510,000 NEVS sold.
The National people’s Congress started on Saturday – we got growth and inflation and other economic ’targets’ for the year ahead on Saturday and as Dr Oliver wrote before their release, they are hard and fast.
In Australia, the NAB business survey for February tomorrow is likely to show a rebound in conditions and confidence following the decline in Omicron cases but consumer confidence for March (Wednesday) may slow slightly reflecting the bad news of the war in Ukraine.
RBA Governor Lowe speaks on Wednesday and will reiterate the RBA’s preparedness to be patient in assessing the rebound in inflation, especially in light of the rises after Russia’s invasion and then financial isolation.
Watch for an update in the bank’s assessment of the impact of the Ukraine war (higher commodity and oil/petrol prices) and the recent floods (higher food prices).
Dr Oliver says both will be watched closely given the additional upside risks both pose to the inflation outlook.
Besides the ECB meeting, there’s data and production data for much of the eurozone this week as well as final GDP figures for December and 2021.
Inflation figures are out in Germany, Spain and Russia where its likely to have risen to 10% or more on an annual basis – roughly doubling in the last four months and heading higher as the economy slumps.nBut worse lays ahead in March and April data.
Elsewhere in Asia there’s the second estimate of Japan’s December quarter GDP growth which could be upwardly revised to 1.5% quarter on quarter from 1.3% in the preliminary reading.
Japanese GDP growth turned a corner in the final months of 2021, and this largely reflects better consumption spending amidst a much-improved outlook for business investment. But again, this was all before the Russian invasion of Ukraine upended global markets.
There will be few major corporate reports anywhere this week except for companies continuing to announce a severing or downgrading of dealings with Russia and Belarus.
Investors and resource companies savouring higher earnings, profits and payouts from the current surge in pricing shouldn’t lose sight of the most basic adage of all in business – what goes up, must come down – quite messily.
