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The Russian-Ukrainian war entered its third month, without any signs that the conflict will be resolved any time soon. After failing to capture Kyiv, Russian forces are focussing their attacks on the Donbass region in the Southeast and with the 9 May Victory Day approaching, we think Russia is likely to step up their offensive against Ukraine (read more in Research Russia-Ukraine – Several signals point to an escalation in the war in Ukraine as Victory Day looms, 26 April).
Global growth concerns have again hit the market mood. Assets that tend to trade closely in tandem with the cyclical outlook have performed poorly and market volatility has increased. News that Russia halted gas deliveries to Poland and Bulgaria after they failed to make payments in Ruble did nothing to turn around sour risk sentiment and sent oil and gas prices higher. Market concerns have been amplified by another COVID-19 outbreak in Beijing, which could trigger a shut-down of the city similar to Shanghai, putting further pressure on global supply chains. Amid broad USD strength, CNY has seen the sharpest weekly decline since 2015, EUR/USD fell to the lowest level since 2017 and USD/JPY moved higher after Bank of Japan stuck to its dovish policy and yield curve cap.
The combination of higher energy prices and a weaker growth outlook put central banks in a tough spot. Yet Riksbank felt no need to wait and hiked its repo rate by 25bp already in April and we look for further rate increases in June, September and November this year. In line with recent comments from Governing Council members, we now expect a first 25bp hike from ECB already in July, followed by continued hikes in September, December and March, taking the deposit rate back to 0.5% in Q1 23.
Incumbent French President Emmanuel Macron secured another five-year term. His re-election bodes well for further EU integration, but he is also facing increasing economic and political headwinds. With only 59% of voters endorsing him for a second term, he has to govern a divided country and the weaker mandate could make it challenging to push ahead with ambitious reforms of the pension, health and education systems. To what degree Macron can implement his plans will depend on parliamentary elections held in June.
Chinese Covid-19 developments will remain in focus next week, while a further decline in Chinese PMIs from already low levels seems likely due to the Shanghai lockdown. A busy week awaits markets also in the US, where the FOMC meeting on Wednesday is the highlight. We expect the Federal Reserve to hike the target range by 50bp, a view shared by consensus and market pricing, and signal that further 50bp rate hikes are looming this year (read more in Fed Preview, 28 April). The US jobs report released on Friday will be interesting in that respect. We expect the job market continued to tighten in April, with an increase in nonfarm payrolls of ~400k and possibly a further drop in the unemployment rate to 3.5%. On Thursday, we expect Bank of England to hike the Bank Rate to 1.00% from 0.75%, but stick to its softer guidance on the hiking pace from last time. In the euro area, focus will remain on further potential cuts to Russian energy supplies, as the EU is working on another sanctions package that might include an oil embargo. An emergency meeting among EU energy ministers is scheduled for Monday.
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