Hey everyone, very interesting week in the credit markets with interest rates waking up to the fact that rates will be moving higher more aggressively than originally anticipated. Get my take in this week’s Round-Up below.
SOUND BITES:
The major indexes finished lower for the week. Federal policy and war in Ukraine continued to effect market sentiment. Stocks pulled back sharply on Tuesday morning after Fed Gov. Lael Brainard, widely considered very dovish, said in a speech the Feds would start its balance sheet reduction as their May meeting. Then, later that day, Fed Bank of Kansas City President Esther George told Bloomberg that there was “no question” they had to act rapidly to quell inflation.
The week’s economic calendar was relatively light but did show that weekly jobless claims fell much more than expected to 166,000, the lowest number since 1968. And the Institute for Supply Management’s gauge of service sector activity came in slightly below consensus expectations but still indicated robust expansion.
Mid-week the Fed Meeting Minutes hit the news wires indicating policymakers were prepared to reduce the central bank’s balance sheet by USD 95 billion per month, more than the consensus expectation of around USD 80 billion. The minutes also showed that officials were prepared to raise rates by 50 basis points (0.50%) at their upcoming May meeting. By the end of week, futures markets were predicting that the most likely scenario was for the federal funds target range to hit 2.50% to 2.75% by the end of the year—well above its current range of 0.25% to 0.50%. The Fed’s plans for rapid quantitative tightening by reducing its balance sheet caused the yield on the benchmark 10-year U.S. Treasury note to hit its highest level since early 2019. The yield curve, which briefly inverted steepened meaningfully, as the difference in yield between the two- and ten-year maturities increased.
The European Union (EU) joined the U.S. in imposing more sanctions on Russia. Meanwhile, the minutes from the ECB’s March meeting revealed that many policymakers believed that the persistence of high inflation called for immediate steps toward normalizing monetary policy to prevent a wage-price spiral. Investor morale in the eurozone fell to its lowest level in nearly two years in April while German factory orders fell sharply in February, driven mainly by a decline in foreign orders.
The BoJ remains committed to its powerful monetary easing in pursuit of its 2% inflation target, with a view to ensuring price gains accompanied by an increase in corporate earnings and wages. The IMF downgraded its projection for Japan’s economic growth in 2022 from 3.3% year over year to 2.4% while it is also expecting a pickup in inflation, projecting the headline core consumer price index at 1.0% in 2022.
Chinese markets eased as a coronavirus lockdown in Shanghai and expectations for aggressive monetary tightening by the U.S. Federal Reserve curbed risk appetite. The Chinese Services Purchasing Managers’ Index, a private survey focused on smaller businesses, sank to 42 in March from 50.2 in February, its lowest level since the pandemic started
Enjoy this week’s round-up:
Don’t Be A Rat Brain Trader – Be the Red Strip Zebra !!
Trade Smart !
hpb
