Concrete Principles

The Kremlin on Monday said there are “no concrete plans” for a summit between Vladimir Putin and Joe Biden as of yet. Putin convened Russia’s Security Council to discuss the issue.

Russia and France will continue to engage at the foreign minister level, Dmitry Peskov said, hours after the French government bolstered market sentiment with an announcement that Emmanuel Macron successfully brokered a meeting. Both Washington and Moscow agreed to talks “in principle,” but Peskov was only willing to say that Putin and Biden can meet or talk “if needed.”

Later, in a dramatic escalation, Putin recognized both separatist “republics” in Ukraine. The news torpedoed sentiment.

Read more: Putin Recognizes Separatist Republics

Markets will be hostage to competing headlines all week. Recall that the French government said any meeting between Putin and Biden “can only be held on the condition that Russia does not invade Ukraine.” That the Kremlin was even entertaining the idea of a summit subject to that condition cast considerable doubt on Russia’s contention it had no plans for an incursion. Putin’s plans to send forces to the separatist regions (ostensibly for “peacekeeping” purposes) raises the odds of an “accident.”

Meanwhile, on the economic front, Eurozone PMIs breezed past consensus, albeit while signaling persistent inflation pressures. The flash read on the composite index for the bloc was 55.8 for February (figure below), easily ahead of the 52.9 economists expected. The new orders gauge was the highest since August.

The services index topped all estimates. “Eurozone business activity growth accelerated sharply in February as COVID-19 containment measures were relaxed,” IHS Markit said, in the color accompanying this month’s preliminary results.

“Today’s PMI confirms that the economy is dealing with the pandemic better with each wave,” ING’s Bert Colijn remarked, noting that “the downturn in survey indicators has come to a quick halt this winter [as] demand continues to soar for both services and manufacturing.”

That’s the good news. However, as ING went on to say, “this is also resulting in continued strong demand for employment in an already tight labor market.”

IHS Markit’s commentary on price pressures was quite pointed. “While an easing of supply delays helped to reduce raw material input cost inflation, persistent cost pressures caused by rising wages and energy bills led to the sharpest rise in average prices charged for goods and services in the survey’s history,” the release said. The ECB is under pressure to scale back accommodation. Eurozone inflation is running the hottest in history (figure below).

Recall that the latest CPI overshoot came just a day ahead of Christine Lagarde’s incremental hawkish pivot.

In the UK, PMIs were similarly hot. The composite gauge topped 60, almost three points better than the highest estimate. “No sign of improvements in price inflation however, which remained stubbornly high,” Duncan Brock, group director at CIPS, said. “With February’s rate of cost inflation the second highest on record, wage rises, energy costs and continuing raw materials shortages took a sizable chunk out of business profits.”

Inflation in the UK is the highest in decades (figure above). And the BoE is rushing to contain it.

Tensions with Russia threaten to exacerbate inflation in Europe. And that brings us full circle. Whatever happens over the next two weeks, we know the threat of a Russian military operation in Ukraine was (and still is) real. To deny that at this juncture is to be deliberately obtuse.

As for market participants, economists and analysts, Rabobank’s Michael Every on Monday noted that “some are retreating from ‘it isn’t going to happen’ to ‘it doesn’t matter if it does happen’ and listing the ‘geopolitics’ events of the post-WW2 era to point out few of them had a major negative market impact relative to the prevailing global economic/financial backdrop, i.e., what the Fed was doing.”

“Yet in arguing this, all they are doing is showing how little they understand their bogeyman of ‘geopolitics,'” Every added. “They are using this word in the same way politicians who don’t know anything about economics talk about ‘the economy’ to voters who don’t either: Clinging to key words like flotsam and jetsam in a storm — as the waves do their own thing.”