MacroGuy1 Macro Report - 2022-02-24

Current World Economic Snapshot – Thursday Feb 24, 2022

(All times expressed below are New York – Eastern Standard Time)

Since the last report of Feb 21, the major overarching news is that Russia has fully invaded Ukraine. In response, markets have fallen, cryptocurrencies have fallen, government bond yields have risen slightly, and commodities have risen strongly across the board. The US Dollar index has strengthened, and most other currencies have fallen against USD. At the time of writing, BTC was down 8.33% to $34,827.

The Russian Ruble has hit an all-time low against the Euro and USD. They will have to raise interest rates to keep inflation under control, but this weakness in their currency creates more incentive for the population to adopt alternatives such as Cryptos. China is currently working on its own digital currency as a way to remove dependence on the dollar for international trade.

The Greek central bank chief has spoken to Reuters with regards to the invasion and has said that the ECB should remove any talk of rate hikes for the rest of the year, as well as continuing its bond buying stimulus program. This is a huge about-face within a few days of all the hawkish ECB speeches we heard last week and early this week – but not surprising given their record.

However, in my opinion, this invasion of Ukraine will make inflation even worse. We can already see how commodities have hit the roof in response. Furthermore, the Eurozone has a huge housing bubble. Five of the ten countries worldwide that experienced the biggest increase in house prices in 2020 were in the euro zone, according to International Monetary Fund data.

This is raising concerns at the ECB about a new housing bubble that could wreak economic and financial havoc just as memories of the 2008 crash start to fade.
Unfortunately, the ECB cannot jack up interest rates too fast or far to help some euro zone members because it would hammer the most indebted euro zone countries, such as Italy and Greece, and the central bank is keen to avoid another debt crisis.

US yield curve early this week was flattening and is close to turning inverted. Inverted yield curves are the strongest indicator for predicting a recession. If this happens the Fed will have to reassess their plans.

Mercedes-Benz Cars & Vans division more than doubled its annual adjusted earnings before interest and taxes (EBIT) to 13.9 billion euros ($15.61 billion) from 6.8 billion euros last year even as unit sales fell 5%.

Mercedes-Benz expects revenue to rise slightly this year compared with 2021 as supply chain bottlenecks ease, the luxury carmaker said, but added it was too soon to predict an end to the semiconductor shortage.

Upcoming Market Events and Predictions

Thursday

1. Alibaba and NetEase are releasing results today. These will give us an idea of how badly the new Chinese regulations against software, online and gaming companies are affecting profits. I think results will be positive as these companies are still growing their user bases and profit sources. The largest company to report today will be Berkshire Hathaway, and any comments Warren Buffet makes will be keenly received.
   Other significant companies to report will be BHP, Anglo-American, Newmont Goldcorp (all commodities and mining), Intuit (QuickBooks accounting software – the health of the small business sector), Anheuser-Busch (the maker of Budweiser) and Moderna (vaccines).
2. Andrew Bailey, governor of the Bank of England, is speaking at 8.15am. Will be interesting if he follows the lead of the Greek banking chief and becomes more dovish based upon today’s invasion.
3. US GDP is the big number today! Forecast for 7% QoQ Q4. If it meets or exceeds this target, I do not see much market reaction because the focus is currently on Russia. However, if it misses then markets could dive even deeper.
4. At the same time, we have US “Initial Jobless Claims,” forecast to be 235k. This also desperately needs to meet the forecast for the market to not fall further. We already have inflation, and if unemployment and low growth are added to that we will have clear signs of entering a stagflationary environment.
5. New Home Sales for January are out at 10am and expected to show a healthy 806k, which is slightly less than the 811k in December, but most data slow down in January so these are just seasonal movements. I think they will meet this figure because construction is still very strong in the US.
6. Crude Oil Inventories are released at 11am. These are relevant to the oil market and are forecast to be an addition of 0.442m. Any big miss either way could move oil prices irrespective of the Russian issue.

Friday

1. German GDP is expected to be slightly negative due to continued Covid restrictions and shortages in the manufacturing sector. This is priced in and really should not move markets now, whatever the final print.
2. I very much expect Lagarde to become very dovish when she speaks on Friday morning. She could cause the Euro to fall significantly, and bond yields to also fall, as she will use the Russian crisis to dial back the previous suggestions of raising rates.
3. Core Durable Goods orders and Pending Home Sales are out this Friday morning too. Important but will only move markets if the miss massively.
4. The Fed Monetary policy report is submitted to congress. If it is ready by Friday as expected, it can give a strong indication of where rates are headed.

Bitcoin Charts

The chart for BTC was unable to sustain its breakout from last week and has resumed the downtrend. The first level of support is about 33,045 which is in line with the handle of the lowest hammer for February. The next level of support comes at about 30,000, which is the level reached in August 21 from which it bounced back up.

Conclusion

Currently, we have Bitcoin correlating with markets. The two downtrend lines on the chart below show how closely BTC and the Nasdaq 100 have been moving together since November 21. This wasn’t always the case and will not always be the case in future. BTC has had various periods where it behaves as a safe haven and other periods where it becomes more cyclical.

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