Markets are in a positive mood as stocks have regained all the losses they encountered after Russia stepped up its offensive into Ukraine. The Vix, the so-called Wall Street “fear gauge”, has fallen back to the low 20s, not far off its long-term average around 20. The Stoxx 600 dropped more than 10% from immediately before the invasion in late February. It is now back to where it started after the biggest weekly rally since late 2020. Geopolitical risks from the Ukraine crisis are now seen as manageable. We hope it stays that way in a still volatile situation.

Market direction will depend on the course for inflation and employment over the next 12 months. European growth will certainly take a hit through the impact of high energy prices. We get a first look at this impact on the region’s economy in this week’s PMIs. This could present downside risks for the euro as weak data lessens ECB rate hike bets for this year. The failure to close above 1.11 last week may signal a loss of momentum.

Last week saw a dovish hike by the BoE with a potential pause in the cycle which is unlikely to meet aggressive market expectations. Markets still price in another four to five 25bps hikes to 2% by year end. The UK CPI print will grab a lot of headlines, though it is only going a lot higher. But the cost-of-living crisis will depress growth with GBP set to suffer at some point on this outlook.

Major risk events of the week

23 March 2022, Wednesday:

-UK CPI: Analysts forecasts a rise in annual CPI to 5.9% from 5.5% and a core print of 4.8%. The January figure was the highest since March 1992. This is driven partly by a pick-up in food prices but will by no means be the peak in price growth. The Bank of England warned this week that inflation could breach 8% in the coming months.

–UK Spring Forecast Statement: The UK Chancellor is under severe pressure to mitigate rampant inflationary pressures facing UK firms and households. Measures were announced in February, but these look increasingly inadequate. The key question is if he is willing to do so and how he will fund it, while sticking to his fiscal stance.

24 March 2022, Thursday:

–Eurozone PMIs: The market median for manufacturing is seen easing to 56.0 from 58.2. Services PMI is estimated to fall to 55.0 from 55.5. Omicron restrictions are easing across the region. But the Ukraine crisis and supply chain issues are likely headwinds in the coming months.

–US Durable Goods: Orders are forecast to fall to -0.6% in February from 1.6%. Analysts say the segment including transportation is expected to be volatile. The rest of the report is set to be strong suggesting an acceleration in business spending on equipment during the quarter.

25 March 2022, Friday:

–UK Retail Sales: Volumes are expected to remain positive after they surged by 1.9% in January. The improvement in Covid numbers and the ending of the government’s “Plan B” should be a supporting factor. The BRC retail sales monitor softened last month.

–IFO German Business Survey: Economists expect a print of 93.9 this month from the prior 98.9. Easing supply bottlenecks brightened the outlook at the start of the year. But geopolitical tensions and inflation concerns are expected to weigh on sentiment going froward.