Frederik Ducrozet

Central banks: from whatever it takes to whatever it breaks.

🇪🇺Another unsurprising yet unpleasant chart, showing a sharp rise in European consumer inflation expectations. Expectations from companies were much more contained though. The bigger focus will be on potential second round effects, too early to tell.

🧵Let me take you back to August 1990. Three weeks ago, Iraq invaded Kuwait, oil prices have surged, and the FOMC is meeting to decide how to respond. The economy looks wobbly. Payrolls just recorded a small decline. Greenspan talks about a credit bubble that has started to deflate. There's more than a few credit cockroaches. But nobody thinks the US economy is sliding into recession. The Maestro urges stoicism. Nobody knows what’s going to happen in the Middle East, central banks cant really alter the outcome, so its best to provide stability – by doing nothing.

🇪🇺Consumer inflation expectations declined in February, but this is old news anyway: « 97% of the responses were recorded before the onset of the war in the Middle East on 28 February ». Next CES will be key, to be released on 28 April, two days before the @ecb meeting.

🇳🇴 Norges Bank hawkish pivot charted. The policy rate is expected to be raised "at one of the forthcoming meetings" assuming the economy "evolves broadly as currently envisaged".

🇪🇺Euro area consumer confidence - the first economic indicator released for the month of March - unsurprisingly declined.

Current state of the market.

Amid the flood of bad news, two bright spots: Hélène Rey @helene_rey appointed Economic Adviser and Head of the Monetary and Economic Department at the BIS... ...replacing Hyun Song Shin @HyunSongShin who was named Bank of Korea governor. Two fantastic choices, congrats!

Subtle but important point. The ECB's baseline incorporates nearly two rate hikes. The adverse and severe scenarios use the same assumptions, and thus may require more than two hikes to bring inflation back to target. Only makes things sligthly less bad😭

Pick a side *ECB WOULD NEED APRIL HIKE IF PRICE OUTLOOK SOURS, NAGEL SAYS *ECB’S NAGEL: 2022 EXPERIENCES WILL PLAY IMPORTANT ROLE *VILLEROY: ARE IN DIFFERENT SITUATION FROM 2022

Has to be the word of the day.

ECB sources suggesting they could hike in April, but if it goes that far I think June is more likely. ECB meeting: 30 April Consumer Expectations Survey (27 March, too early) Survey of Professional Forecasters (4 May, but they’ll get hints) Corporate Telephone Survey (mid-June)

@darioperkins Who needs big macro models when we know the conclusion?

@fwred so, according to the ECB, the crisis will reduce GDP by 0.3%pts...........

🇪🇺 ECB decision more balanced. The GC is "well positioned to navigate this uncertainty", not signalling any imminent move. Risk scenarios to be published at 3:45pm. Key will be "the magnitude of indirect and second-round effects of a stronger and more persistent energy shock."

🇪🇺 Unfortunately for the ECB, and despite the staff best efforts to use a later-than-usual cut-off date, their baseline scenario looks instantly obsolete. Market pricing for inflation is already consistent with the adverse scenarios. The main question is about indirect effects.

🇪🇺 ECB's risks scenarios, including a severe shock generating a mild recession, a rise in unemployment and core inflation peaking at 4%. The latter don't include any monetary policy change as @Lagarde noted, as opposed to the staff which accounts for about 40bp of rate hikes.

Mood:

🇬🇧 BoE unanimous and unambiguously hawkish. Brace for impact.

🇨🇭 Stronger verbal intervention language from the SNB: "the SNB's willingness to intervene in the foreign exchange market has increased". snb.ch/en/publication…