Tuesday could see the most important data release of the week, as traders are desperate for data on how the war in the Middle East is actually affecting the economy. Flash PMI figures are the first bit of major data from the period after the US and Israel attacked Iran, providing valuable insight into the real-world impact on the economy.
Up until now, markets have been reacting based on guesses of how the war might affect the economy. Most central banks last week held off in changing policy, awaiting data. Many might hike as soon as April, since they will have the March economic figures. Tomorrow’s PMI release is the first of those figures to become available, and could set the trend for expectations. Crucially, Purchasing Managers are particularly sensitive to prices. Meaning traders will be laser-focused on the pricing component in the PMI figures.
The More Vulnerable Economies in Focus
The flash data will cover a few major economies, including three that are seen as particularly vulnerable to the energy supply shock resulting from the closure of the Strait of Hormuz. Those are Japan, the UK and the Eurozone. Both Japan and the EU import more than 90% of their crude consumption, with the EU needing to buy the majority of its energy overseas.
The worry is that higher energy costs will drive up inflation, prompting central banks to raise rates. This combination of higher inflation and interest rates would significantly slow economic growth, making their respective currencies less valuable. The Euro has already fallen to lows not seen since July of last year. The situation for the yen is more complicated because policymakers are already threatening to intervene to prop up the currency.
It’s Also a Matter of Timing
Markets are pricing two to three rate hikes from the ECB, and at least two from the BOE. But what could have a more immediate impact on the market is the timing of those hikes. Brokers suggest that both central banks could hike as soon as April, depending on how price data evolves in the meantime. That could hurt both currencies more than if central banks can wait it out one more month and see how the situation in the Middle East resolves.
Economists know that it will take some time for the effect of higher energy costs to filter through the economy. Therefore, what could affect the market is the degree of pressure in PMI price data, which assesses the speed and force of price changes. If prices are already rising substantially, then that might mean central banks will have to pull the trigger on hikes. But, if there are fewer signs of price pressure, then central banks might be able to hold off or a while.
What the Market is Looking For
First up is Japan, which is expected to post a Flash composite PMI for March of 51.3. Down from 53.9 but still above 50 and therefore in expansion. Also on Tuesday is the release of February CPI, which is expected to decline to 1.3% from 1.5%. However, markets are likely to look past that data as being “old” in the current circumstances.
Given Britain’s access to North Sea oil, markets anticipate that the EU will be more affected than the UK. First up is the Eurozone composite PMI, which is projected to decline to 51.1 from 51.9, but stay in expansion. Meanwhile, the UK is seen declining to 53.0 from 53.7 in February.