Investors tense ahead of Fed minutes and Russia sanctions
Yesterday, hawkish comments from Federal Reserve (Fed) Governor Lael Brainard rocked markets as she said upcoming interest rate hikes would need to be more aggressive to rein in soaring currency. inflation in the United States, and that the Fed could begin to reduce its balance sheet by nearly $9 trillion as early as next month, and at “a rapid pace”.
Because the market is fully primed for a conical crisis on the rates front, it was mainly comments regarding a potentially aggressive balance sheet reduction that mainly dampened market sentiment yesterday, sending the S&P500 down around 1 .26%, below its 100-DMA. The Nasdaq sold 2.26% and closed the session below 15,000.
Both indices are starting to show positive signs and, more importantly, the short end of the US yield curve is rising so sharply that the inverted yield curve is raising fears of an impending US recession.
In this tense environment, investors will be watching Fed minutes closely today. It wouldn’t be surprising if the Fed hinted at a 50 basis point hike at the next meeting. Fed funds futures activity puts the odds of a 50 basis point hike at more than 75%.
Yet what will really make the difference is how quickly the Fed shrinks the balance sheet. And there is great potential for hawkish pricing on this front.
Market risks remain tilted to the downside given the hawkish turn in the latest comments from Fed officials, scary inflation numbers, combined with abnormally high employment reports and higher wages support the he idea that if there’s a good time for the Fed to put the brakes on its ultra-lose policy, it’s now.
In the FX
Brainard’s comments sent the US dollar higher yesterday. The Dollar Index is now preparing to flirt with the 100 offers, the EURUSD has fallen below the 1.09 level while the Cable has fallen below the 1.31 mark, but if the Fed minutes do not reveal not another hawkish surprise, we will see the dollar return the latest gains and the euro and the pound see a slight rebound.
The United States and the Europeans are expected to announce a new round of sanctions against Russia after atrocities in newly liberated towns of New kyiv by Russian troops who threw gas on the fire. While the US Treasury will suspend Russian dollar debt payments to increase pressure from a default, the EU is expected to announce a ban on Russian coal imports. Banning Russian coal is a small step in banning Russian energy, because Europeans are still not ready to stomach the idea of a Russian oil and gas ban just yet, because that would be too hard on the economy.
The reduced risk of a European ban on Russian oil keeps the oil bulls contained. The barrel of US crude is consolidating a little above the $100 mark. Technically, the price is still above the 50-DMA which has not been significantly broken lower, thus remains the main support to pull out for a deeper downside correction in oil prices.
In terms of data, the latest API data showed a surprise increase in US oil inventories last week of around 1 million barrels. More official data from the EIA will provide a clearer picture of US oil inventories, but any positive news (higher inventories) will certainly not be enough to trigger a lasting negative movement in oil prices.