Todays podcast

https://soundcloud.com/user-291029717/putin-on-the-brink-fed-out-of-sync?in=user-291029717/sets/the-morning-call&utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing

Overview All Right Now (Maybe Not)

• US equities (were) turning up after rough European day, after Putin says on TV diplomacy is ‘all right’
• But suffer on reports of Russian troop movements – it’s choppy out there!
• US Treasuries reverse most of Friday’s yield decline
• Fed’s Bullard still angling for 100bp of Fed tightening by July, George undecided on 25bp vs 50bps
• Lagarde says ECB won’t rush to remove stimulus, act at right time but in gradual manner
• USD bid, but AUD holds up well, unlike NZD (cross approaching 1.08)
• RBA Minutes, Japan, EU GDP, US PPI

All right now baby, it’s all right now, All right now baby, it’s all right now – Free

They say a week is a long time in politics. True, but an hour can sometimes seem a lot longer in financial markets. Cranking up the PC to start this note an hour ago, The S&P500 and NASDAQ had both scraped into the black after what has been a rough European day for risk assets, albeit the latter partly playing catch-up to the late Friday sell-off in US equities on intelligence reports that a Russian incursion into the Ukraine was likely this week. The early Monday afternoon turnaround in US stocks followed a staged TV appearance starring President Putin and his foreign minister Sergei Lavrov in which Lavrov is heard telling Putin that he support diplomatic efforts with the west, to which Putin replies ‘All right’.

Yet with another half hour of New York trade remaining, the S&P is back in the red (-0.5%) following reports of satellite images being circulated purportedly showing Russian troops leaving assembly points and moving to attack positions. This has helped bring US Treasury yields down from their intra-day highs at both ends of the US curve, while keeping the safety bid under the USD (and too the JPY and CHF). The AUD isn’t doing too badly in the circumstances, holding above 0.71 after a visit below (low of 0.7086) during the European morning.

The febrile state of risk asset markets linked to  Russia-Ukraine related news reports hasn’t completely deflected attention from Fed policy considerations. Overnight, St. Louis Fed President James Bullard has, on CNBC, repeated his call for the Fed to lift the Funds Rate by 100bps by July (meaning at least one 50bps move out of the March, May and June FOMC meeting). Meanwhile Kansas Fed President Esther George has been out hosing down suggestions that the Fed should raise rates outside of scheduled meetings – something to which Bullard also appears opposed – but says that market expectations for a half-point rate rise in March ‘paves the groundwork for deliberations’. George also says she supports selling bonds from the Fed’s portfolio. Prior to this latest ‘risk off’ moves in market, Fed Funds futures were back showing more than 40bps of Fed tightening priced for March, but this has since pared back to around 33bps just in the last hour or so.

US Treasury yield have, not surprisingly, been volatile across the yield curve. 2-year notes had earlier in the US day fully reversed Friday’s late day plunge, (to be back above 1.60%) but have since dropped back a bit, while US 10s briefly revised the 2% handle (high 2.02%) but are 1.995% now.  European bonds earlier finished mixed, with benchmark German bonds lower but Euro peripheral yields higher, while gilts were +4.5bps at 10-years.

ECB President Lagarde has been out saying that the ECB won’t rush to remove stimulus but will act at the right time and then only in a gradual manner. This really leaves us none the wiser as to what the ECB might decide on March 10, even though centrist Governing Council member and Irish central bank head Gabriel Makhlouf was in the FT at the weekend saying that “The idea that we could hike interest rates in June looks very unrealistic to me.” Makhlouf did though say the ECB could end its bond buying programme in June, or a few months later (which is where the market interest currently lies, on the premise that rates won’t rise until after bond buying stops).

Currencies have also been somewhat choppy. While mostly characterised by (safe haven) outperformance by the USD, JPY and CHF, somewhat surprisingly the AUD has been one of the better performing currencies , back above 0.71 having spent some time below earlier in the European day (low of 0.7086, 0.7130 now).  Commodity price gains, with oil (Brent up over $1 to $95.60) and metal prices (led by a 2.5% rise in aluminium) could be deemed supportive, though these are the ‘wrong’ type of gains, coming as they do on fears of supply disruptions linked to the Russia-Ukraine situation. It does though attest to a still very short speculative market. In contrast, the NZD took a hit during our time zone yesterday, on a combination of a sharp fall in the NZ/BNZ Services PMI (45.9 from 49.8, Omicron impacted) then very strong food prices, the latter seeing our BNZ colleagues lift their Q1 CPI pick to 6.6%. A whiff of ‘stagflation’ here.  The up shot is the AUD/NZD cross trading to as high as 1.0780.

Coming Up

• This morning’s RBA Minutes shouldn’t be market moving given we’ve heard so much from Governor Lowe and other Board members in speeches or testimony since the February meeting, as well as the SoMP.
• Japan Q4 GDP is the main piece of economic news in our time zone. A strong expected outcome (1.5% QoQ, 6.0% annualised) will flatter to deceive, with covid related restrictions so far this year seen making a Q1 GDP contraction a good bet at this stage of the quarter.
• Offshore, preliminary Eurozone Q4 GDP is forecast at +0.3% q/q, 4.6% y/y. The German ZEW survey for February is also out today, with modest improvements seen in both Current Situation (-7 from -10.2) and Expectations (55.0 from 51.7).
• Various January and December UK labour market figures are released. Unemployment dropped back to 4.1% in December (seen unchanged in January) and is nearing its 3.8% pre-pandemic low. The BoE will be watching weekly average earnings for December. Earnings fell back to 3.8% ex-bonuses (3m y/y) in November and are seen having slipped to 3.6% in December.
• The main US data interest tonight is PPI, where some moderating in annual rates of growth are expected (to 9.0% from 9.7% for the headline Final Demand figure and to 7.8% from 8.3% for core (ex-food and energy). Also due is the Empire (NY State) manufacturing survey, seen at +11 from -0.7%, and Existing Home Sales, expected +1.5% in January after -0.2% on December.

 
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