While investors may be able to take the Federal Reserve’s post-pandemic first interest rate increase in stride while markets remain uncertain about the Ukraine crisis, they might not appreciate the uncertainty surrounding the Fed.
That is what the Fed clearly stated. it intends to raise its target fed funds rateIt will increase its interest rates by 25% from zero. This announcement is likely to be made at Wednesday’s two-day meeting. It will also release new projections on inflation, interest rates, and the economy.
A few important economic reports are available for the week ahead: the producer price index Tuesday and retail sales Wednesday, as well as existing home sales Friday.
“Earnings have ended. “Earnings are over. Monetary policy is clearly going to be crucial here. Steve Massocca (Managing Director at Wedbush Securities) said that he doesn’t expect the Fed to surprise anyone next week. It’s only going to take a quarter of a point, then you can step back and observe what’s taking place in Europe.
Stocks dropped for the week with the Nasdaq CompositeThe worst performer was the Russell 2000, which saw a decline of 3.5%. The Russell 2000 small-cap index, which performed better than the other majors, dropped 1% over the same week.
The rise in oil prices has scared investors. Crude rose to $130 at the beginning of the weekBut trading was back to $110 by Friday
The S&P 500For the week, it was down 2.9%. With an increase of nearly 1.9%, energy stocks were the best performing sector. They are also the most positive major.
Volatility will continue to rise across financial markets due to uncertainty surrounding the outcome of war in Ukraine and Russian sanctions on commodity markets.
Watch closely the statements and comments of Fed Chair Jerome Powell, Wednesday’s central bank statement. They will provide guidance as to how central bank officials see the Ukraine crisis.
His guidance will likely not be any different. what he had to sayIn the [congressional] testimony. “Basically, upside and downside risks to growth have increased,” stated Mark Cabana from Bank of America’s U.S. short rate strategy.
Russia is a huge commodity producer its assault on Ukraine and resulting sanctionsA rally in commodities markets has caused already scorching inflation to get even more intense. February’s consumer price index was up 7.9%Economists believe that rising gasoline prices will push it over 9% by March.
The price of gasoline at the pump rose nearly 50c to $4.33 for unleaded in the last week. according to AAA.
According to market pros, rising inflation is a positive sign that the Fed will continue raising interest rates. Uncertainty about economic prospects could mean that the Fed might not raise interest rates as often as some analysts predict.
Cabana believes that Fed officials will forecast five more hikes in 2022, and four additional next year. Three increases were previously forecasted by the Fed in each of these years. Cabana stated that the Fed may reduce its 2024 forecast to one increase from their previous outlook.
The Fed will be providing information on its plan for the balance sheet of nearly $9 trillion. Officials stated that they wanted to reduce it this year, after increasing interest rates. Wall Street calls this “quantitative tightening,” which is the Fed’s replacement of maturing Treasury bonds as they are rolled off.
Cabana said, “That they’ll be ready in May to turn the switch on QT is our base case.” However, he acknowledged that there may be risks later. Cabana stated that if Fed is not in the position to increase interest rates as high as they hope, then it might delay shrinking its balance sheet, which would make policy more loose.
Bond market liquidity
The 10-year TreasuryAfter falling below 1.7% in the previous month, Friday’s yield reached 2%. Bond yields are opposite to price.
It’s inflation, and inflation expectations. Treasurys respond differently in such an environment than a flight towards quality assets,” Cabana explained. Although you may notice a higher level of inflation in the Treasurys, it is possible to see quality assets moving into Treasurys.
Cabana indicated that the market is showing concern over the uncertainties in Ukraine. The Treasury market, for instance is less liquid.
We have observed that volatility has been seen in the Treasury market. The spreads between bid and ask have increased. There are some parts of the market that have been less liquid in the past, including TIPS or the 20-year.He said that we are also witnessing market depth shrinking.” “This can be attributed to market participants’ increased uncertainty and their lack of willingness and ability to take on risk, which should concern the Fed,” he said.
Cabana stated that markets don’t show major stress.
We are not seeing any signs that the funding wheels may be falling or that counterparty credit risk is high. However, there are many indicators that things may not be well.” he stated.
We continue to monitor funding markets and they are showing real premiums for dollars. He said that people are willing to pay a premium for dollars, which is something they’ve not done since Covid.
Cabana stated that the market wants to be reassured by the Fed about its monitoring of the Ukraine conflict.
He stated that if Fed showed a high level of confidence in any direction, it could upset the markets. This seems highly unlikely.
On the week, the dollar index rose 0.6% and continued to rise during Russia’s aggression on Ukraine. This index measures the value of the US dollar relative to a range of currencies. It is heavily weighted towards the euro.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex also pointed out that although the market for dollar financing is under pressure, it isn’t strained.
The dollar has reached five-year highs against the Japanese yen today. He said that this is not the kind of thing you’d expect from a risk-off climate. This is a testimony to the dollar’s strength.
Chandler indicated that the dollar could weaken in coming weeks if it continues to hike its interest rate.
“I think there might be a buy the rumor, sell the fact on the Fed,” he said. It is not unusual for the dollar’s value to rise ahead of the rate increase and then fall after it.
Boil the oil
The market was worried that Russia’s sanctions would cause oil prices to spike and this caused them to erupt in a wild flurry of activity. Fearing financial sanctions and other consequences, buyers have avoided Moscow’s oil. U.S. said it would ban purchases of Russian oil.
West Texas Intermediate crude futuresAt the start of this week, the price per barrel rose to $130.50 but settled at $109.33 on Friday.
Helima Croft from RBC’s global commodities strategy, said that the $130 market was too high. She also pointed out the U.S. ban against Russian oil. The Monday price surge was due to speculations by market players that there would be an even wider embargo against Russian oil. This could include Europe.
“Right at this moment, the market seems too extreme in any direction. The price is reasonable at $110. The price is justified at $100. “I don’t think that we’re heading for an off ramp, and I believe there’s room to go higher,” she stated.
Week ahead calendar
FOMC meeting begins
8:30 a.m. Empire State manufacturing
4:00 p.m. TIC information
8:30 a.m. 8:30 a.m.
8:15 a.m. Survey of business leaders
10:00 AM Business inventories
10:00 a.m. NAHB survey
Federal Reserve Interest Rate Decision and Economic Projections at 2:00 PM
2:30 p.m. Briefing by Jerome Powell (Federal Reserve Chair)
8:30 a.m. 8:30 a.m.
8:15 a.m. Starts Housing
9:00 a.m. Philadelphia Fed Manufacturing
9:15 a.m. Industrial production
10:00 a.m. Existing home sales
Charles Evans, President of Chicago Fed