European stocks are higher out of the gate on Monday. Ukraine sounded ready to make a number of concessions to call off the war, including neutral status, though any progress seems difficult still. The fact the Kremlin on Friday narrowed the goals of its operation to areas in the south and east suggested it was struggling on the ground; it bodes well for Ukraine that Kyiv is not the prime target – scope for a ramp out for Putin and Zelensky.

We left last week on a bit of a sour note in terms of the European and UK consumer sentiment. EU consumer confidence has tumbled due to the war in Ukraine, whilst business confidence has also been shattered. In the UK, escalating fuel, energy and staff costs resulted in the steepest rise in prices charged since the PMI series began in November 1999. Escalating inflationary pressures and concerns related to Russia’s invasion of Ukraine meanwhile led to a slump in business optimism to its lowest since October 2020. 

Friday saw the US consumer also looking in a tough spot. The University of Michigan consumer survey said 32% of all consumers expected their overall financial position to worsen in the year ahead, the highest recorded level since the surveys started in the mid-1940s. “The combination of rising prices and less positive income expectations meant that half of all households anticipated declines in inflation-adjusted incomes in the year ahead.” Of course, inflation is the chief topic at the kitchen table: Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4%, the highest since November 1981. 

Ahead of this week’s nonfarm payrolls report, it’s worth noting the following from UoM: “The sole area of the economy about which consumers were still optimistic was the strong job market. Consumers anticipated in March that during the year ahead it was more likely that the unemployment rate would post further declines than increases (30% versus 24%).” 

Rates moved aggressively higher on Friday, with the US 10yr now above 2.5% and the 2s10s spread down to just 10bps, and this weighed on stock market sentiment a tad but not much. What’s been noticeable is the ability of stocks to shrug off rising rates. This cannot last and we saw cracks appear on Friday. Higher rates plus deteriorating conditions for consumers is bound to drag stocks down. Volatility has declined with the Vix down to the mid-20s, which indicates conditions for chopping sideways. 

Week ahead….With the Federal Reserve going all-in with the hawkish language, traders will be watching a barrel-load of key US economic data this week for clues as to the likely course of action by the central bank in the months ahead. PCE inflation, PMI releases and the all-important nonfarm payrolls report mean this will be a busy week ahead.  

Inflation … US CPI inflation hit 7.9% in February, the highest level for 40 years. Now the focus will be on this week’s PCE inflation report, which is the Fed’s preferred measure of inflation. Last month’s report covering the month of January showed the PCE price index increased 6.1 percent from one year ago, reflecting increases in both goods and services. Energy prices increased 25.9 percent while food prices increased 6.7 percent. Excluding food and energy, the PCE price index for January increased 5.2 percent from one year ago.  Market pricing suggests the Fed could do two back-to-back 50bps hikes at the next two meetings. Recent rhetoric from several Fed officials indicate growing support for a more hawkish move. Jay Powell left the door open to 50bps hikes last week, saying inflation was much too high. The core PCE inflation number will help policymakers decide. 

Jobs … The jobs report has arguably taken on a little less significance of late, since we know the labour market is extremely tight and inflation is the main worry for the Fed. The last two reports have indicated very strong labour market growth at the start of the year and this trend is likely to Nevertheless, there is still a tendency for volatility around the release and traders will be paying extra close attention to the wage data for signs of a wage price spiral so feared by policymakers.

Other data … Market participants will also be watching for the ISM manufacturing PMI from the US, as well as the Chicago PMI. Ahead of the nonfarm payrolls report on Friday, we get the ADP jobs number, whilst JOLTS job openings are released on Tuesday.

Oil markets and other commodities will continue to remain sensitive headlines from the Ukraine conflict. Peace talks have yielded little and increasing concerns about tightness in the physical market were evident last week with steep backwardation emerging again in the futures curve. However, prices of crude were lower early Monday as fears about Chinese demand did the rounds after officials started to lock down Shanghai. OPEC+ meets this week.