New York Stock Exchange Trader, March 11, 2022.
Investors may rush to raise interest rates after the first pandemic of the Federal Reserve, while uncertainty about the Ukrainian crisis rests on the market.
The Federal Reserve has clearly broadcast its intention to raise the target federal funds rate by a quarter percentage point from zero and will announce the move at the end of Wednesday’s two-day meeting. .. Central banks also need to reveal new forecasts for interest rates, inflation and the economy.
There are some notable economic reports last week, including Tuesday’s Producer Price Index, Wednesday’s retail sales, and Friday’s existing home sales.
“Revenues are over. Monetary policy will obviously be important here. I don’t think the Fed will surprise anyone next week,” said Steve Massocca, managing director of Wedbush Securities. See the background and what’s happening in Europe. “
Stock prices fell last week and the Nasdaq Composite fell 3.5%, showing the worst performance. Meanwhile, small cap Russell 2000, which surpassed the three major indices, fell 1% in a week.
Soaring oil prices surprised investors, with oil soaring to $ 130 at the beginning of the week but falling below $ 110 on Friday.
The S & P 500 fell about 2.9% this week. Energy stocks rose nearly 1.9% and were the only positive major sector top performers.
The impact of Russian sanctions on commodity markets and the lack of clarity about the consequences of the war in Ukraine can keep the volatility of financial markets as a whole high.
A statement by the Central Bank on Wednesday and a comment by Federal Reserve Chairman Jerome Powell commented on how central bank officials view the Ukraine crisis and how it affects their outlook and interest rate paths. We are carefully watching the guidance on what could be given.
“His guidance is probably he [congressional] testimony. Basically, the downside risk to the growth outlook has increased and the upside risk to inflation has increased. “
As Russia is a huge commodity producer, the assault on Ukraine and the associated sanctions have begun to rebound in the commodity market, where already burning inflation is rising. The consumer price index in February was 7.9. With a percentage rise, economists saw a rise in gasoline prices surpassing 9% in March.
According to AAA, pump gasoline surged nearly 50 cents last week to $ 4.33 per gallon of unleaded gasoline.
Market pros see the surge in inflation as a catalyst to put the Fed on track to raise interest rates, but uncertainty about the economic outlook isn’t as high by central banks as some economists predict this year’s seven rate hikes. There is also the possibility. ..
Fed officials expect to raise rates five times in 2022 and four more next year, Mr. Cabana. The Fed previously expected to raise rates three times each year.
It’s also important to comment on the Fed’s plans for a balance sheet of nearly $ 9 trillion, as officials say they want to start shrinking this year after they start raising rates. Mortgages roll off, which can delay the process that Wall Street calls “quantitative tightening” or QT.
“Preparing to switch on the QT in May is our basic case, but we acknowledge that there is a risk that it will be distorted later,” Kabana said. Expected interest rates can quickly delay balance sheet shrinkage and loosen policies.
Bond market liquidity
After falling below 1.7% earlier this month as investors sought bond security, the Treasury yields above 2% at Friday’s highest level. Bond yields move at the opposite price.
“This is inflation and inflation expectations. In this environment, government bonds behave a bit differently than flights to quality assets. This is a dynamic different from what we have observed. To the quality of government bonds. You may see flights, but government bonds reflect higher inflation expectations. “
Mr Cabana said the market is showing signs of concern about Ukraine’s uncertainty. For example, the Treasury market is illiquid.
“We have found that the Treasury market is becoming more volatile. We are seeing bidasque spreads widening. The market is more traditionally illiquid, as in TIPS and 20 years. Some of the parts may be illiquid, he said, “the depth of the market is diminishing,” “all this is increasing uncertainty and risk to market participants.” I think we need to worry about the FRB because of the lack of willingness to take. “
But Mr. Cabana said the market is not showing great stress.
“There are no signs of slowing funding or very high counterparty credit risk, but there are many signs that everything isn’t working,” he said.
“Another thing we’re roughly watching is the funding markets, which show a true premium against the dollar. People earn the dollar the way it has been since Covid. I’m paying a lot to do that, “he said.
Mr Cabana said the market is seeking peace of mind from the Fed that it is monitoring the conflict in Ukraine.
“I think it would confuse the market if the Fed shows very high confidence in either direction,” he said.
The dollar index rose 0.6% that week, even while Russia was attacking Ukraine. This index is the value of the dollar against a basket of currencies and has a great deal of emphasis on the euro.
Marc Chandler, chief market strategist at Bannockburn Global Forex, also points out that there is some pressure on the dollar funding market, but not tensions.
“Today’s dollar has hit a five-year high against the yen, which is not what we expect in a risk-off environment,” he said.
Chandler said the dollar could fall next week if the usual rate hike guidance is followed.
“I think we might buy rumors and sell the facts at the Fed,” he said.
Oil turned violently last week, reaching a high that hasn’t been seen since 2008, fearing the market isn’t getting enough oil to sanction Russia. Buyers avoided Moscow’s oil for fear of violating financial sanctions. It will ban the purchase of Russian oil.
West Texas Intermediate Crude Oil futures jumped to $ 130.50 a barrel at the beginning of the week and settled at $ 109.33 on Friday.
“I think it was a bit premature for the market to rise to $ 130,” said Helima Croft, head of global commodity strategy at RBC, pointing out that the United States has banned Russian oil. There will be a broader embargo on Russian oil, including its main customer, Europe.
“Currently, the market is too extreme either way. I think it’s justified at $ 110. I think it’s justified at over $ 100. I don’t think it’s heading off-ramp. I think there’s room to go. . Higher. “
Calendar one week ahead
Revenue: Vail Resorts, Cooper Software
FOMC meeting begins
8:30 am PPI
8:30 am Empire State Manufacturing
TIC data at 4 pm
Revenue: Land’s End, Shoe Carnival, Fighting Fish, Renner, PagerDuty
8:30 am Retail sale
8:30 am Import price
8:30 am Business Leader Survey
Corporate inventory at 10 am
NAHB survey at 10 am
2:00 pm Federal Reserve Interest Rate Determination and Economic Forecast
2:30 pm Briefing by Federal Reserve Chairman Jerome Powell
Revenue: FedEx, Accenture, Commercial Metals, Signet Jewelers, Dollar General, Designer Brands, Warby Parker
8:30 am First unemployed bill
8:30 am Housing starts
8:30 am Philadelphia Federal Manufacturing
9:15 am Industrial production
10:00 am Existing home sale
2:00 pm Chicago Fed President Charles Evans