Week Ahead – PMI Flash to Put Recession Risks Front and Center, SNB Meets

The coming week will calm down a bit after a busy period for central banks and geopolitical events. But there is still plenty of activity ahead as the latest PMI flash readings are expected and the Swiss National Bank will keep the monetary policy theme going, not to mention how the war in Ukraine will play out amid the slow negotiations for a ceasefire.


Will eurozone PMIs mark a slowdown?

The fallout from the conflict in Ukraine had a huge impact on global markets and economic prospects as the world plunged into a new crisis as it emerged from another. But the most surprising impact has been on inflation, as sanctions on commodity-rich Russia have exacerbated pressures on already boiling prices.

While everything from energy, agricultural and metal commodities has been on the rise since Russia invaded Ukraine, the pressure on businesses and consumers has tightened further, raising fears of a recession. Europe is more at risk of another downturn as it has become too dependent on Russian oil and gas to meet its energy needs over the years.

European exporters will additionally have to bear the consequences of harsh Western sanctions and, combined with soaring input costs, business confidence has already started to decline. This puts even more emphasis on Thursday’s flash PMI figures for the Eurozone for March as investors will want to see if the geopolitical unrest on the doorstep of the European Union is hurting economic activity.

The European Central Bank has just announced that it will end its asset purchase program at some point during the summer, but has not committed to a timetable for raising rates. If the PMI data is weaker than expected, bets on higher rates could be scaled back and the euro could slide again, having just rebounded from 22-month lows against the US dollar.

The SNB should not change its political trajectory

The decline of the euro against the Swiss franc was also quite pronounced. The euro/franc briefly fell below parity on March 7 as fighting in Ukraine intensified and speculation mounted that the ECB would delay its stimulus release. The Swiss National Bank likely intervened to depress the franc, but its demand deposit data suggests it did so only modestly.

Nevertheless, the SNB is expected to reiterate its promise to intervene if necessary to keep the franc low at its meeting on Thursday, as the currency has appreciated along with other safe havens such as the dollar and the yen during this period of weakness. turbulence. The SNB recently revised its inflation forecast for 2022 upwards, while lowering its growth projection for the year.

However, inflation is still seen at just 1.9%, so the SNB is unlikely to signal any tightening as it keeps the key rate unchanged at -0.75%.

Yet investors are predicting that the SNB will have raised rates out of negative territory by the first quarter of 2023. Although in reality, this is only possible if the ECB does the same. Until then, the SNB should stick to exchange rate intervention to prevent any unwarranted surge in the franc as geopolitical risks remain high.

Can Sunak stop the fall of the pound sterling?

Flash PMI prints are also expected to come out of the UK on Thursday and, as with the Eurozone, they are expected to decline in March. The February retail sales figures released on Friday will also be important. Although the economic pain in Britain from sanctions on Russia will likely be less than in the euro zone, investors were already worried about how rising inflation and energy bills would affect household spending in a consumer-driven economy.

These concerns could explain why the pound did not really benefit from the Bank of England’s rate hikes. The BoE raised the bank rate for the third consecutive meeting this week as inflation continues to rise. Data released on Wednesday is expected to show the UK consumer price index jumped 5.9% year-on-year in February.

But despite soaring prices, it looks like some policymakers have already started to get cold feet about further tightening amid the Ukraine crisis, as there was some surprise dissent in the BoE vote.

The pound is now at risk of revisiting the recent 16-month low of just below $1.30 unless Chancellor Rishi Sunak comes up with a plan to help households and small businesses cope with soaring fuel prices during his spring budget statement on Wednesday.

Sunak is under pressure to provide further relief from the measures he announced in February and if he delivers, the pound could recover some lost ground.

Ukrainian headlines could dictate the direction of the dollar

Unlike the BoE, the hawkish signals emanating from the Fed at its March meeting could not have been stronger. Still, the dollar slid after the decision, suggesting that rate hike expectations are now fully priced in. It’s hard to see how next week’s second tier data could put the wind back in the dollar’s sails.

New home sales for February will be the first major release on Wednesday, followed by durable goods orders for the same month and the final fourth-quarter GDP estimate on Thursday. Flash PMIs are also released on Thursday. While not as closely watched in the U.S. as the ISM PMIs, investors will still be watching them to see if input and output price inflation is close to peaking and if growth momentum remained strong in the first half. March. Pending home sales will end on Friday.

In a crucial month for central bank meetings, monetary policy has somewhat stole the show from the headlines of the war over the past two weeks. But with the ECB, Fed, BoE and BoJ decision now out of the way, geopolitics will likely take control again.

If efforts for a ceasefire between Russia and Ukraine fail, the dollar could resume its bullish trend, putting pressure on its main rivals, the euro and the pound.