Daily Market Outlook, March 17, 2022

Overnight Headlines

Fed Lifts Funds Rate A Quarter Point And Signals More Hikes To Come
Fed Pricing Signals Larger Rate Hike At One Of The Next Two Meetings
Ukraine Mounts Counteroffensive To Drive Russians Back From Cities
Ukrainian President Warns World War III 'May Have Already Started'
UK MP Withdraws No Confidence Letter As 'Partygate' Troubles Ease
Bank Of England Set To Raise Bank Rate Again As Uncertainty Swirls
BoJ Governor Kuroda Sees Inflation Remaining Short Of 2.0% Target
Japanese Machinery Orders Fall For The First Time In Five Months
Australian Unemployment Rate Drops To 4% In Boost For Rate Hawks
Iran Releases Prisoner Amid Hopes Of Breakthrough In Nuclear Talks
US Yields Surge And Curve Flattens As Fed Signals Aggressive Stance
Crude Prices Rise After IEA Supply Shortfall Warning; Gold Also Gains
China Stocks Extend Stunning Surge As Traders Cheer Support Vows

The Day Ahead

Asian equity markets posted strong gains, buoyed by positive comments on the US economy by Fed Chair Powell last night, as well as reported progress in Ukraine peace talks and speculation that China’s central bank may cut interest rates. Japan’s Nikkei index closed up more than 3%, while the Hang Seng surged by over 5%. Bond markets, however, were less effusive about economic prospects, with the US Treasury yield curve flattening and parts of it inverting.

Following yesterday’s US Fed policy update, it is turn of the Bank of England (BoE) today with an announcement due at 12:00GMT. Since Russia’s invasion of Ukraine began on the 24th February, a range of commodity prices have risen sharply. Although they have partly fallen back, the risk is that the near-term peak in UK CPI in April is likely to be nearer the 8% mark rather than the 7¼% rate expected by the BoE. Moreover, survey and financial market-based measures of inflation expectations have also risen and are likely to climb higher still as the annual rate of inflation moves even further above target. As a result, concerns over the potential for second-round effects, especially through higher wages, is likely to have increased among members of the rate-setting committee. Overall, with the economy seems to be holding up better in Q1 than the BoE forecast, expect the MPC to raise policy rates for a third successive meeting, hiking Bank Rate by 25bp to 0.75% with the decision likely supported by most, if not all, nine members of the MPC. Looking further ahead, the extent to which events in Ukraine persist, and the potential impact this has on the UK’s growth and inflation outlook, will be an important consideration for the MPC. As March is not one of the meetings that features updates to official economic projections, the earliest opportunity for the Bank of England to provide these will be alongside the May policy decision. Nevertheless, with higher-than-expected inflation set to worsen the squeeze on household real incomes, current market expectations of an additional 150bp of Bank Rate increases this year may be excessive.

In Europe, there are several ECB speakers today at the ‘ECB and Its Watchers’ conference, including an address from President Lagarde and contributions from Chief Economist Lane and Executive Board member Schnabel. Eurozone final CPI inflation for February is expected to confirm the flash estimate showing a rise in the annual headline rate to 5.8%. In the US, industrial production and housing activity data will be watched. Early Friday, the Bank of Japan is expected to leave its policy settings unchanged.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.0885 (261M), 1.0910-15 (325M), 1.0970-80 (603M) 1.1000 (1.0BLN), 1.1075-85 (690M), 1.1100 (398M)
USD/JPY: 117.00 (471M), 117.50 (200M), 117.75 (230M) 118.00 (205M), 118.50 (229M). GBP/USD: 1.3200 (236M)
EUR/GBP: 0.8375 (558M), 0.8490 (300M)
USD/CAD: 1.2530 (330M), 1.2560 (745M), 1.2625-35 (426M) 1.2680-90 (496M).
AUD/USD: 0.7150-55 (2.18BLN)