Daily Market Outlook, March 31, 2022

Overnight Headlines

Asian equity markets are mixed to lower as the first quarter draws to a close. Chinese stocks underperformed as the latest PMI surveys were weaker than expected. The manufacturing PMI fell to 49.5 and the non-manufacturing index declined to 48.4, both below the 50 growth/contraction level. Lockdown measures in parts of China to tackle Covid outbreaks will probably weigh further on the PMIs next month. Meanwhile, oil prices fell after reports that the US is considering releasing a million barrels a day from its strategic reserves.

The Lloyds Business Barometer, released earlier today, showed a fall in UK business confidence of 11 points to 33% in March. It was the biggest one-month drop since the early days of the Covid 19 pandemic and brings confidence to an eight-month low, but it remains above the long-term average of 28%. The report also reveals that both pay and price inflation pressures are continuing to build, which will likely maintain the pressure for further interest rate increases by the BoE at least in the near term. Separately, the ONS revised up Q4 GDP growth to 1.3%q/q from 1.0%q/q. Consumer spending growth, however, was revised lower and the savings ratio fell.

In Europe, further signs of rocketing inflation mainly due to accelerating energy costs will be in evidence today. Yesterday saw preliminary March CPI inflation estimates (EU-harmonised measures) for both Germany and Spain far exceeding consensus forecasts, with annual rates rising to 7.6% and 9.8% respectively. Earlier this morning, France reported an increase in its March annual inflation rate to 5.1%, also stronger than expected. Italy will reveal its data later this morning. It means that tomorrow’s Eurozone flash annual CPI estimate will be well above the original consensus forecast for 6.7% and probably higher than even our initial forecast for 7.3%. Although high inflation predominantly reflects imported costs, there will even intense discussions among ECB rate-setters whether to increase interest rates before the end of the year after the likely end to QE in Q3. The ECB’s Chief Economist Lane is scheduled to speak today.

The US data focus today will be on personal spending figures and the PCE deflator (the Fed’s preferred inflation measure) for February, ahead of tomorrow’s labour market report. The PCE deflator is forecast to show annual inflation rising to 6.5%, a 40-year high providing further confirmation that near-term inflationary pressures remain intense. Consumer spending growth is expected to normalise to around 0.5% after a stellar outturn in January. Overall, a buoyant labour market is supportive of the consumer, but high inflation has weighed on sentiment.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1000 (3.15BLN), 1.1050-60 (634M) 1.1070-80 (1.19BLN), 1.1100-05 (1.67BLN) 1.1110-15 (658M), 1.1120-25 (880M), 1.1130-35 (453M) 1.1150-60 (896M), 1.1175 (501M), 1.1195-05 (2.6BLN) 1.1230 (337M)
USD/JPY: 121.60-70 (740M), 123.50 (455M) 124.00 (350M)
GBP/USD: 1.3195-00 (693M)
USD/CAD: 1.2500 (658M).
AUD/USD: 0.7400 (500M) 0.7500 (1.73BLN), 0.7550 (579M), 0.7600 (445M)