Difficult to see clearly on the future evolution of the Ukrainian conflict, which oscillates between de-escalation and stalemate. Indeed, if the discussions continue between Ukraine and Russia, the two Presidents reporting rather favorable progress (which moreover enabled the markets to rebound during the week), on the ground on the other hand the situation is deteriorating. In addition to the continuous bombings, including one just 20 kilometers from the Polish border on a base where foreign military aid arrives. Russia has, according to the New York Times, requested military aid from China while sanctions from Western countries go crescendo. Finally, only energy imports are still resisting the sanctions. One thing nevertheless seems certain to us: while a ceasefire would be undeniably positive and would cause a good part of the stock market indices to retrace, the damage has been done to growth and inflation.
In this uncertain context, we could have expected the ECB to adopt a more accommodating tone or, at the very least, to temper its monetary tightening, as we thought. In the end, nothing happened. The European institution thus announced that it would accelerate its tapering by reducing the amount of asset purchases under the APP to 40 billion euros in April, 30 billion in May and 20 billion in June for stop completely during the third quarter. In addition to this change, the ECB has slightly modified its communication on the timing of the first rate hike after the end of the asset purchases, from "shortly after" to "some time after", even if Christine Lagarde indicated that this could mean weeks as well as months... Although the President of the ECB has defended herself against any acceleration of the normalization of monetary policy, the market does not seem to hear it that way and didn't expect this in times of stress. Concretely, in the current vagueness, the ECB does not want to find itself overtaken by inflation (if this is not already the case) and thus puts all the "options on the table" by leaving itself the possibility of raising rates before the end of the year. Between safeguarding growth and fighting inflation, it seems to have made its choice. Note that this meeting was also an opportunity for the ECB to update its growth forecasts (3.7% against 4.2% in December for 2022) and inflation (5.1% against 3.2% in December for 2022) but these already seem outdated with the consequences of the Ukrainian crisis, the unfavorable scenario (2.5% growth and 5.9% inflation) being more likely to occur. This normalization movement should also continue this week with the meetings of the Fed and the BoE and a probable increase in key rates in both cases. Especially since across the Atlantic, the macroeconomic data still show rising inflation (7.9% against 7.5% the previous month) although in line with expectations, with at the same time the consumer confidence index is almost at its lowest since the 2008 crisis.
Finally, it could be that the Covid page, which has been relegated to the background, is not completely turned. Indeed, the number of cases in China is increasing sharply, forcing authorities to confine 17 million people in the Shenzhen metropolitan area. The exit from the "zero covid" strategy will be complicated for China, all the more so with a vaccine deemed less effective. The tensions on the supply chains are therefore not likely to fall...
