US EARLY MORNING: US equity futures are higher; Powell testimony eyed to see if Fed normalisation is delayed; ADP jobs data due ahead of Friday's NFP

AHEAD:

POWELL TESTIMONY (15:00GMT/10:00EST): The key question is whether the FOMC is shifting towards a more gradual pace of monetary policy normalisation due to the geopolitical fallout relating to Russia. The data has continued to show inflation pressures, while politically President Biden told Americans on Monday that fighting inflation was his 'top priority'. Money markets have virtually priced out the prospects of a 50bps rate hike at the March 16th FOMC meeting, and now sees a 25bps rate rise as the most likely outcome. And even over the course of 2022, markets are now pricing a somewhat shallower rate trajectory, with around five hikes now seen before the end of this year vs seven that were seen a fortnight ago, before the Russian invasion of Ukraine; and looking a little ahead of that, pricing of the terminal rate has also eased, with money markets seeing rates peak out at between 1.50-1.75% (the most recent Fed forecasts projected 2.5%). Traders will also be watching out for any details on balance sheet reduction (and if these plans have also been rocked by geopolitical events). So far, markets only really know that the Fed's pace of balance sheet normalisation will be quicker than it was previously and that it will ultimately comprise mainly of Treasuries, but there is little other definitive information relating to the pace of the run-off, when the Fed will begin outright sales, and what the eventual size of the balance sheet will look like. In terms of a text release, this has on occasion been released early (was released at 13:30GMT/08:30EST in July 2021, but was released at 15:00GMT/10:00EST in February 2021). You’ll be able to watch the Powell testimony live here at 15:00GMT/10:00EST.

BOC RATE DECISION (15:00GMT/10:00EST): The consensus expects the Bank of Canada to lift rates by 25bps to 0.50%. RBC argues that the recent Russia/Ukraine fallout will be unlikely to dissuade the bank from hiking. "Though added disruptions to global supply chains would eventually filter into Canadian trade flows, and higher commodity prices could boost costs for energy and food products, Canada’s direct trade exposure to Russia and Ukraine is small," RBC writes, "the domestic economy is also too strong — and inflation pressures too firm — to justify the current emergency levels of interest rates." RBC reminds us that in January, the BoC was of the view that Omicron would be less severe than previous COVID waves, and that seems to be transpiring, although the labour market took a knock in January, RBC says spending levels appear to be surging back in February as pandemic restrictions ease. Another area of focus will be on the Bank’s bond reinvestment plans. Currently, it is continuing the reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant. TD Securities expects the Bank will remain in its reinvestment phase for the balance sheet, and that will signal more rate hikes are to come. Citi says it would be hawkish for the BoC to announce the end of balance sheet reinvestments, and while it is not its base case, it warns that there could be some more communications around the details of how balance sheet runoff will work when it starts.

Full Newsquawk Day Ahead calendar can be accessed here. 

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02 Mar 2022 - 10:08- EnergyGeopolitical- Source: Newsquawk

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