Barcelona, Spain – The campaign of the Federal Reserve (Fed) against inflation weighs on the financial markets. On the day of the most anticipated event of the week, the publication of the minutes of the last meeting of the US central bank, index futures on the US and European stock exchanges fell.
In addition, the sale of sovereign bonds intensifies. The premium on the 10-year bond is already over 2.6%, standing in the 2018 and 2019 ranges, reflecting bets that the Fed will carry out the biggest monetary tightening in almost three decades.
In the United States, futures indexed to the Nasdaq 100 fell more than 1%. Tech giants including Twitter Inc, Microsoft Corp and Tesla Inc were some of the worst performers in pre-market trading. In Europe, the Stoxx 600 index was down around 1.5%, with the travel, auto and technology sectors leading losses.
🔦 The Fed under the spotlight
The Fed today publishes the minutes of its March 16 monetary policy meeting, in which it confirmed the market’s forecast of an interest rate hike and signaled that monetary tightening would not stop there.
Investor expectations are high, especially after the incendiary speech by Lael Brainard, who heads the Minneapolis Fed. Brainard said the Fed will steadily raise rates and shrink the balance sheet at an accelerating pace beginning in May.
This was, by the way, the most shocking news, as investors expected a reduction in the Fed’s balance sheet a little later. One of the ways the Fed can reduce its balance sheet, currently hovering around $8.9 trillion, is to liquidate maturing securities, rather than rolling over debt by issuing new bonds. In practice, that means removing liquidity from the markets.
🏦 Strong arguments
The skyrocketing inflation, with the consumer price index at the highest level in the last 40 years, and the labor market at levels close to full employment, give the Fed arguments to endorse a more aggressive monetary policy.
“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably faster than in the previous recovery,” said the Minneapolis Fed Governor, who is awaiting the Senate confirmation to be appointed vice president of the monetary authority.
Investors fear that a tighter US central bank could eventually sink the world’s largest economy, even pushing it into recession. The resurgence of the virus in Asia and the war in Ukraine also cloud the outlook for prices and growth.
🤝 Shall we agree?
In addition to clues about the central bank’s next actions, today’s minutes will give an idea about the agreement between the members of the Fed, since on the one hand there is skyrocketing inflation, but on the other the war in Ukraine and covid-19 they threaten the supply of raw materials and the pace of production chains.
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🟢 The bags yesterday: Dow (-0.80%), S&P 500 (-1.26%), Nasdaq (-2.26%), Stoxx 600 (+0.19%)
The Fed’s more aggressive wink at the time of raising interest rates caused US stock markets to close in the red. The war in Ukraine has also affected operations: a new round of sanctions, in addition to a possible embargo on Russian coal, would include a ban on all new investments in Russia and other measures against financial institutions and state-owned companies.
These are the events scheduled for today:
• USA..: MBA Mortgage Applications; MBA Shopping Index; Mortgage Market Index; EIA Oil Refineries Activity; Crude Oil Inventories; EIA Distillate Inventories; Gasoline Production and Inventories
• Europe: Euro zone (PPI/Feb); Germany (Industrial Orders/Feb); Spain (Consumer Confidence)
• Asia: Japan (International Reserves/Sea)
• Latin America: Brazil (IGP-DI/Sea; Currency Flows); Mexico (Gross Fixed Investment/Jan)
• Central banks: FOMC/Fed meeting minutes; Speeches by Luis de Guindos, Fabio Panetta, Philip Lane (BCE), Asahi Noguchi (BoJ)
📌 And for tomorrow:
• USA.: Initial Applications for Unemployment Subsidy; Natural Gas Inventories; Consumer Credit/Feb
• Europe: Euro Zone (Retail Sales/Feb); Germany (Industrial Production/Feb; Thomson Reuters/IPSOS/Apr); UK (Halifax House Price Index/Mar; Home Equity Loans; Thomson Reuters/IPSOS/Apr)
• Asia: Japan (Index of Leading Indicators; Current Account Transactions); Hong Kong (International Reserves/Sea)
• Latin America: Argentina (Industrial Production/Feb)
• Central banks: The ECB publishes the minutes of its last Monetary Policy meeting. Interventions by James Bullard, Charles Evans, Raphael Bostic and John Williams (Fed), and Burkhard Balz (Bundesbank)
— With information from Bloomberg