Market Update

The ongoing conflict in Ukraine remains deeply distressing as Russian advances persist. However, several major equity markets managed to conclude the week on an upward trajectory.
To paraphrase the renowned economist, John Maynard Keynes, "when the facts change, we change our mind". While we've consistently maintained in these updates that inflation would peak in 2022 and then gravitate back to the central bank's 2% target in 2023, recent events compel us to shift our stance. We now anticipate a delayed and more pronounced peak in inflation, driven primarily by the implications of Russia's assault on Ukraine.
Ukraine, a major global exporter of commodities like wheat, corn, barley, and sunflower oil, has seen its port operations severely hampered. Concurrently, sanctions against Russia, another significant grain supplier, have choked off their output. This disruption is poised to push food prices significantly upwards. The ongoing conflict threatens this year's agricultural production as well, given the impending sowing season.
Additionally, the recent surge in energy prices—impacting everything from fuel costs to the production of plastic, household items, clothing, food, and metals—heralds the onset of even greater inflation.
In the face of such challenges and the ensuing market volatility, maintaining perspective is crucial.
Despite potential inflationary spikes, we expect central banks to adopt a measured approach to interest rate hikes. The economic ramifications of Russia's invasion have effectively levied a global "tax", forcing consumers to shell out more for essential goods and services. With less room in already tight budgets, discretionary spending will inevitably decline—significant given that consumers drive around 60% of the UK's economy and two-thirds of the US's.
Thus, while central banks will undoubtedly take action to counter inflation, they're unlikely to employ aggressive rate hikes as a tool, especially considering such measures won't expedite oil extraction or crop harvests.
This nuanced approach was evident in recent remarks by the ECB President, Christine Lagarde. She indicated an accelerated winding down of the monetary stimulus but hinted at a lengthier interval before any interest rate hike in the Eurozone. Such moderation in interest rate adjustments bodes well for global equities.
Moreover, while we brace for more sustained inflation than we've been accustomed to, we foresee these transitory inflationary pressures soon translating into next year’s ‘base effect’—pointing to a sharp dip in inflation figures once we move past the current energy crisis.
In the coming week, all eyes will be on the Fed's policy meeting on 16 March 2022. While an interest rate increase is on the cards to maintain their inflationary credibility, they might lean towards a 0.25% hike instead of the earlier hinted 0.5%. Meetings of the BoE and BoJ policymakers are also scheduled for Thursday and Friday, respectively.
Additionally, the week will feature UK employment data, the Empire State manufacturing survey, US retail statistics, housing figures from the US, industrial production data from the US & China, and Japanese CPI insights.