The Day at a Glance | March 10 2022

The Top

*Inflation in the United States accelerated to a 7.9% annual rate during February, in line with estimates.

*ECB surprised markets by announcing a faster than expected withdrawal of monetary stimulus.

*Russia-Ukraine negotiations to stop the armed conflict failed.

*The United States called for war crimes to be investigated in Ukraine.

*In response to sanctions, Russia will halt the export of medical, tech, agricultural, automotive and electric goods through 2022.

*U.S. warns Chinese companies that they must respect sanctions imposed on Russian exports; especially in the semiconductor industry.

Economic environment

Inflation in the United States accelerated as expected. The Consumer Price Index logged a 0.8% monthly rate of acceleration during February and once again set at a 40-year high; 7.9% annual. The most important contributing factors to inflation were energy related goods (3.5% monthly), food (1%), and housing (0.5%). The rise in energy related goods didn’t capture the most recent increases in oil prices, which will probably affect data in March. In the underlying component, commodity prices increased more moderately (0.4%), as the first decrease in used automobile prices was logged in 5 months (-0.2%), and clothing, medical goods and services became more moderate. However, transportation and housing service prices accelerated, which led to a 0.5% rise in underlying inflation during the month, and set at an annual 6.5% rate. Data suggests that inflation had started to lose momentum prior to the conflict in Ukraine, as was expected by analysts, who forecasted that the peak in inflation would occur in February. However, it´s possible that the acceleration in prices will persist at least through March, given the recent shock in energy and grain prices. Nevertheless, the circumstances have not modified expectations of the Federal Reserve starting the increasing rates cycle with a moderate, 25bp rise in next week´s meeting.

ECB moves monetary normalization plans forward. In its monetary policy meeting this morning, the European Central Bank announced that it will reduce its asset purchasing program to 30 billion euros in May and 20 billion euros in June, with the possibility of completely ending the program in June. The decision moves its previous plans of eliminating the purchasing program forward in light of inflation, which has set three times above the bank´s target level. Markets expected the ECB to maintain its monetary stance due to the conflict in Ukraine, but said conflict was precisely the argument used to withdraw stimulus faster, given the inflationary risks it poses. Rates remained unchanged (-0.5% deposits; 0% refinancing). The Euro appreciated in light of the news and money markets moved expectations of a (25bp) interest rates increase forward to October instead of December. Lagarde assured that inflation could be considerably higher in the short term, but continues to expect it to return to its target level in 2024. She assured that the ECB will end the purchasing program in the 3Q22 if there are no signs that inflation will decrease; the rise in rates will occur after, and will do so gradually.