Take Five: War and peace

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Tensions over Ukraine are set to keep markets on edge in the week ahead while U.S. consumer data and results from major U.S. retailers will give fresh insights into shoppers’ minds as well as inflation and supply chains.

PMI data could show how major economies are faring as governments dial back on COVID restrictions while flattening yield curves demand attention as the U.S. Federal Reserve’s key March meeting draws closer. Meanwhile, by how much will New Zealand’s central bank hike rates?

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Here’s your week ahead in markets from Wayne Cole in Sydney, Ira Iosebashvili in New York, Sujata Rao, Dhara Ranasinghe and Karin Strohecker in London.

1/SHELLING AND TALKING

Tensions over Ukraine between Moscow and Washington and other Western capitals have dominated markets in recent days, and there is little sign of this abating as major Western powers warn of a possible imminent Russian invasion.

Diplomatic efforts are continuing at full steam: U.S. President Joe Biden and Russian President Vladimir Putin have agreed in principle to a summit over Ukraine, offering a possible path out of one of the most dangerous European crises in decades – provided there is no invasion.

Secretary of State Antony Blinken has accepted an invitation to meet Russian Foreign Minister Sergei Lavrov late this week.

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Satellite imagery appears to show Russian deployments closer to Ukraine’s border, and sounds of fighting were heard on Monday in eastern Ukraine, where Ukrainian government forces are fighting pro-Russian separatists.

2/A GAME OF CONFIDENCE

After blowout retail sales numbers, U.S. consumers are back in focus as markets parse consumer confidence data and watch a flood of earnings from major retailers for a readout on how soaring inflation is affecting shoppers.

January consumer confidence readings showed expectations for short-term growth ebbing, viewed by some economists as a warning sign against the backdrop of a stock market rout. Stocks have remained volatile in February as investors digest a hawkish shift from the Fed and worry over a potential escalation between Russia and Ukraine.

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Earnings from retailers will add to the mix: Home Depot, Lowe’s, Macy’s and Footlocker are among those scheduled to report fourth quarter results. In addition to bottom lines, investors will be listening out for how firms are managing the supply chain crisis and their views on inflation.

3/INFLATION SCARE VS GROWTH SCARE

Flattening bond yield curves — when gaps between short- and long borrowing costs narrow — are grabbing attention these days. The U.S. 2-year/10-year curve compressed recently below 40 basis points, the flattest since mid-2020. Canada’s curve narrowed to 22 bps, and the UK curve is a whisker off inversion.

An inversion, when short-dated yields rise above the longer segment, is often – though not always – followed by an economic recession.

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Bond traders appear to believe that central bankers, who earlier let inflation run hot, will now rush in with aggressive, front-loaded interest rate hikes, potentially causing a recession.

A BofA survey showed just 12% of investors expect an economic recession and most remain overweight equities. But if inflation continues to surprise to the upside, those bond yield curves may continue their path towards inversion.

4/ RATE HIKE – BUT BY HOW MUCH?

The Reserve Bank of New Zealand (RBNZ) is considered certain to raise the 0.75% cash rate for a third time in five months when policy makers meet on Wednesday.

The only question is whether Governor Adrian Orr and others will stick to quarter point moves or up the ante to 50 basis points, after recent data showed inflation and labor markets running hot.

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Policy makers have long expressed a preference for gradual moves, but swaps still imply a one-in-three chance of 50 basis points. The RBNZ is also likely to project a hike at every meeting this year, and perhaps an ultimate peak of 3.0%.

5/ LIVING WITH COVID

As the Omicron-COVID variant surged in late 2021, many major economies chose not to return to the strictest lockdown restrictions. Now with cases easing in Europe, governments appear more confident in removing more measures.

Germany has flagged an easing of restrictions soon; those testing positive for COVID in Britain won’t have to self-isolate from late Feb.

Flash February PMIs due over the coming days — euro area and UK ones are out on Monday — could show how such developments are lifting economic activity. Sentiment in Germany has already received a boost and further positive news could encourage central banks to unwind post-pandemic stimulus fast.

Still, policymakers will watch how other governments fare. Hong Kong and mainland China, for example, aim to suppress the virus – a strategy that could have global repercussions if it pressures supply chains.

(Compiled by Karin Strohecker, editing by Gareth Jones)