In Focus: NI Protocol, UK CPI, Reaction to US Inflation and Tensions in Moldova

Amendments to Northern Ireland Protocol Near Possible Completion

Questions over the extent to which possible amendments to the Northern Ireland Protocol are nearing their completion are continuing to keep policy makers, households, and businesses at the edge of their seats. Earlier this week, headlines circulated suggesting that negotiations were approaching their conclusion, suggesting that a revised deal could be brought to the surface and help alleviate recent political stalemate.

Presently, the Northern Ireland Protocol remains in place having been ratified by the UK and EU in 2019 and allows for the free movement of goods to take place across the border between NI and the ROI. Nevertheless, given the political sensitivities of establishing a physical customs border on the Island of Ireland, Westminster and Brussels agreed to establish controls on goods entering Northern Ireland from Great Britain – a state of affairs which has been vehemently opposed by the DUP.

Such has been the DUP’s opposition to the NI Protocol (which in effect creates a customs border on the Irish Sea), the unionists have continually blocked electing a speaker in Stormont which acts as a prerequisite to forming a government. As such, the Northern Ireland Assembly has existed in a state of limbo since May 2022, severely limiting legislative or executive functions there. Hence, it is hoped that an amended deal which is gathers stronger bipartisan support could allow for NI Assembly to resume its functions.

One possible option that continues to gain traction is segmenting trade into ‘red’ or ‘green’ lanes, enabling customs checks to be better streamlined. Though for many within the ERG wing of the conservative party, questions remain about the European Court of Justice’s role as the final arbiter of the treaty, a point which has proved contentious for many of them. As such all eyes are on whether the latest round of negotiations will yield an amicable deal that will allow for power sharing in Stormont to continue.

Market Reaction to Softer-than-Expected UK CPI

This morning has seen markets react to UK headline CPI coming 0.2 percentage points softer-than-expected as it hit 10.1% on an annualised basis. This marks a deceleration in the annualised rate of inflation from last month’s print of 10.5% as the month-on-month figure also suggested deflation of 0.6%, the first time this index has fallen in over a year. Sticking with headline CPI, the figure represents the third consecutive monthly fall, as it dropped to the lowest level since September 2022. This came as transport costs, fuel and restaurant prices decelerated while prices also rose at a slower pace for food to the tune of 0.1 percentage points down from last month’s print of 16.8%).

As such, money markets have revised down their expectations of the BoE’s rate hike course with some 22bpts in the price for Threadneedle Street’s next meeting on 23rd March. The market also seems to be pricing in a terminal rate of some 4.5%, suggesting that the BoE are approaching their peak rate.

While CPI came in softer-than-expected, annualised RPI came in at 13.4% beating expectations of 13.2%, a concerning sign given that some 25% of the UK’s debt is linked to the RPI index and is used to determine the price increases of items such as train tickets.

US CPI Print Puts Further Pressure on Equities ?

Given yesterday’s US CPI coming 0.2 percentage points higher than market expectations and pushing treasury yields higher, further pressure was applied on US equities. Nevertheless, while investors may have been slightly disconnected over the higher-than-expected print, some optimism was gained on the basis that it was the softest annualised print since late 2021.

As such, yesterday’s close saw the S&P 500 end the day marginally lower having lost 0.03%, after a choppy session which saw the index rise as much as 0.54% and falling as much as 1.02%. The Dow Jones also closed in the red, losing 0.46%, while the Nasdaq finished 0.57% higher .

On the continent, the STOXX 600 index closed marginally higher at 0.08% up while more globally, the MSCI's world index closed 0.10% higher.

US Treasury Yields Rise As Investors Consider Fed’s Next Move

As alluded to, the higher-than-expected inflationary print in the US sent treasuries rising, as expectations of further Fed hikes continued to gain traction. Here, the 10-year yield rose 2.8bpts as the two-year (which is more sensitive to short term hikes) closed 8.1bpts higher.

Oil Closes Lower As US Inventories Soar

As investors assessed the implications of US inflation data and the impact it would have on the Fed’s monetary policy, energy markets also considered how US crude inventories rose by 10.5m barrels last week. This follows the US government’s announcement earlier in the week which saw them release a further 26m barrels of oil from strategic reserves. As such WTI crude futures have fallen below $78dpb, having fallen a little over 1% in the last month.

Tensions Heighten on Ukraine’s Western Flank As Moldovia Accuses Russia of Attempted Coup

Yesterday, Moldova closed its airspace as concerns over the republic’s security escalated. Moldova lies directly to the west of Ukraine with its capital Chi?in?u being located just 150km away from Odessa and was one of the fifteen SSRs at the time of the USSR’s dissolution. Since the Russian invasion of Ukraine, it has thus had to face the prospect of the Kremlin’s aggression potentially entering its borders. Such considerations are exacerbated by the presence of Transnistria - a de facto pro-Kremlin breakaway state which unilaterally seceded from Moldovia after the USSR’s collapse.

Yesterday’s closure of Moldovan airspace comes as the government in Chi?in?u accused Russia of plotting to overthrow the country’s government which is presided over by its pro-Europan president, Maia Sandu. Furthermore, according to the Guardian “Zelenskiy told EU leaders that Ukraine had intercepted a plan from Russian intelligence, having uncovered a document that showed “who, when and how was going to break the democracy of Moldova and establish control” over the country.” Sandu has also accused Russia of enlisting agents to incite violence and as such the fragile situation continues to be monitored as thoughts turn to the latest sign of growing tensions ?in the region.?