Key events in developed markets next week

The US data calendar is largely second-tier releases this coming week with the ISM services index the likely highlight. It has fallen sharply over the past three months from an all-time high of 68.4 in November to a 12-month low of 56.5 in February. The Omicron wave was likely responsible for the bulk of the decline, although the squeeze on spending power from surging inflation may also have hurt demand. We are hopeful of a corrective bounce in March, but with consumer sentiment remaining subdued and a growing sense that aggressive interest rate hikes are on their way, the upside for the ISM is likely to be limited.

We will also be closely following the minutes of the March Federal Open Market Committee meeting. The Federal Reserve raised interest rates 25bp and has since signalled more aggressive 50bp moves are firmly on the table at upcoming meetings. At the accompanying press conference, Chair Jerome Powell suggested that the Fed would soon announce plans to shrink its $9tr balance sheet, and some details could emerge from the minutes.

Powell suggested that the run-off will be similar in structure to 2017-19, but could happen at a faster pace. The Fed could potentially announce such action at the May meeting, but it could come later if it wants to see how a series of 50bp hikes are digested by markets. We suspect it will start how it ended the last round of quantitative tightening – by allowing $50bn of maturing assets to run off their balance sheet each month. This could quickly be stepped up to $100bn given the doubling in size of the balance sheet since the start of the pandemic.

In Canada, there is a growing likelihood that the central bank will follow up its initial 25bp rate hike in early March with a 50bp move in April. The Canadian economy has recovered all output lost during the pandemic while employment is at all-time highs and inflation is running at the fastest rate since 1991. This week’s data flow includes the March jobs report and another gain is expected after February’s post-lockdown surge. We will also get the quarterly Bank of Canada business outlook survey and a firm reading here given Canada’s strong commodity production background amid surging prices could boost expectations for a 50bp hike on 13 April.