Week ahead: Ukraine war, ECB and US inflation in focus

Ukraine’s ongoing fight against the Russian invaders will continue to drive a lot of the market price action this week, particularly in the commodity space where we have seen a blowout in front-month crude. Elsewhere we are looking to see what the European Central Bank response to the crisis is when it meets on Thursday. And with inflation soaring, US CPI numbers will be the main data release in the coming days. 

Ukraine War 

Front and centre for investors this week is of course the war in Ukraine. The situation remains dynamic, and we cannot rule out just about any outcome at this stage. Stock markets have been moving on headlines but on the whole held up pretty well. Energy and other commodity markets have been a lot more volatile, with prices surging to 14-year highs across the board for things like Brent and wheat.  

ECB Response 

The European Central Bank meets on Thursday for a scheduled policy meeting. Only a few weeks ago we were talking about tightening: an end to the asset purchase programme and likely rate hike later this year. 

After its meeting at the start of February, it looked almost certain that the ECB was preparing markets for an abrupt change in forward guidance coming at the March meeting. Markets started pricing for hikes this year, but the situation in Ukraine has changed the calculation. But it’s not clear what direction the market will take. 

On Wednesday, amid a sharp rally for sovereign debt, markets were pricing in less than 15 bps worth of rate hikes by December by the European Central Bank; last week it was 35bps by year end. But by Thursday yields had rallied and the market was again pricing in a 95% chance of 30bps worth of hikes by December. Shifting sands make it hard to trade. 

ECB Governing Council member Gabriel Makhlouf said the central bank was likely to agree on a faster wind-down of asset purchases at its March meeting but agreement on when to raise rates are less clear. ECB’s Holzman said war could slow down tightening, keep QE going longer. 

There does seem to be a large range of potential outcomes in terms of the war, and an even larger variety of potential responses by the ECB. This should keep EUR traders on their toes. 

US Inflation 

Inflation is soaring in the US and elsewhere. The Russian invasion of Ukraine, and subsequent surge in commodity prices, is only going to make things worse. Last time out the headline CPI number hit 7.5%, the highest in 40 years, but traders are expecting it go higher still. Inflation swaps price CPI above 8% in the next few months. Does spiking inflation lead the White House to do what it needs to do and get the shale companies drilling again?  

Major economic data (times in GMT)