The financial market volatility is up and the liquidity (ability to trade in and out without moving the market price with your buy/sell) is correspondingly very low. Of course, much of this has to do with the Russia/Ukraine conflict, but there are lots of other market movers coming up this week. The Federal Reserve is meeting (and supposedly going to raise interest rates,) we have an inflation print coming that will probably top 10%, a retail sales number that will be terrible, possible Russian debt default, and crazy new Covid numbers raging across China. This week will be crazy. As Deutsche Bank's Jim Reid summarizes what's coming - it's a big central bank week with the Fed the obvious focal point mid-week. The BoE and the BoJ also hold meetings, along with some of their emerging markets counterparts. We'll also see CPI for Japan and Canada and a number of housing market statistics in the U.S. and China. Earnings will include Volkswagen, FedEx and Enel, among others. – Wow – buckle your seat belt…
The Fed is expected to raise rates for the first time since December 2018 after its meeting concludes on Wednesday. Markets are pricing in a .25% hike in short term rates, in line with the rhetoric from Chair Powell at his congressional testimonies a couple of weeks ago. Many market observers were expecting .50% hike in the short-term rates before Russia invaded Ukraine – that is likely on hold at least for now. Fed Funds Futures pricing are still trading at levels indicating that the Fed will raise rates about 7 times (total of 1.75%) in this cycle. We will believe that 7 rate hikes will happen only when we see them…
Here are the highlights of the week courtesy of Deutsche Bank:
Monday March 14
Data: France trade balance
Other: Annual review of the "shopping basket" in the UK
Tuesday March 15
Data: U.S. PPI, China property investment, industrial production, fixed assets ex. rural, retail sales, Germany ZEW survey expectations, UK jobless claims change, ILO unemployment rate 3 months, Eurozone ZEW survey expectations, industrial production, Japan trade balance, Canada housing starts, manufacturing sales
Earnings: Volkswagen, RWE, Generali
Wednesday March 16
Data: U.S. retail sales, import price index, export price index, business inventories, NAHB Housing Market Index, China new home prices, Japan capacity utilization, core machine orders, Canada CPI, wholesale trade sales
Central banks: Fed decision
Earnings: Lennar, E.ON, Inditex
Other: NATO defense ministers meet
Thursday March 17
Data: U.S. housing starts, building permits, initial jobless claims, industrial production, capacity utilization, Japan CPI
Central banks: BoE meeting, ECB's Lagarde, Lane, Schnabel, Visco speak
Earnings: Accenture, Enel, FedEx, Dollar General, Verbund
Friday March 18
Data: U.S. existing home sales, leading index, Italy trade balance, Eurozone trade balance, labor costs, Canada retail sales
Central Banks: BoJ meeting, Bank of Russia meeting
Earnings: Vonovia
Of course, all eyes are on the Fed this week, but we are very concerned about the inflation number and retail sales numbers as other indicators. We continue to monitor the markets to look for cracks in the dam indicating that more serious breakdowns of markets may be imminent. Obviously, things can change in a moment when war is on the horizon, but we do find it interesting that in such a potentially crazy week in the markets, this morning is showing a huge pull back in two of the panic indicators – crude oil and gold. Take a look…
Of course, all bets are off if war escalates, and we are not suggesting that you run out and sell your gold. But it is curious that in such a potentially crazy week some of the panic indicators are pulling back so hard. We are not suggesting that deflation is around the corner, but we are suggesting that the Fed won’t have to raise rates as much as many are expecting to calm inflation down. The Fed is probably shooting for a place where short term rates are 2-2.5% and the ten year rate is around 3% in order to “Goldilocks” us out of inflation fears and reel in some of the misallocated resources from the pandemic period. We think pullbacks in asset prices and other excesses will do much of that work before the Fed gets to those interest rates. Time will tell…
Regards and good investing,
Greyson Geiler