Federal Reserve is expected to raise interest rates next week

A trader on the NYSE, March 11, 2022.

Source: NYSE

Investors are likely to proceed with the Federal Reserve’s first post-pandemic rate hike, while uncertainty over the Ukraine crisis continues to haunt the markets.

The Fed has made it clear that it intends to increase the target provided funds rate by a quarter of a percentage point from zero and is expected to announce that move at the end of a two-day meeting on Wednesday. The central bank should also publish new forecasts for interest rates, inflation and the economy.

There are a number of economic reports to watch out for next week, including the producer price index on Tuesday, retail sales on Wednesday and existing home sales on Friday.

“It’s going to be a quarter point and then step into the background and see what’s happening in Europe,” said Steve Massocca, managing director at Wedbush Securities.

Stocks have fallen over the past week, with Nasdaq Composite underperformed with a 3.5% drop. Meanwhile, the Russell 2000 small-cap index, which outperformed the three major indexes, has lost 1% for the week.

Rising oil prices spook investors, with crude soaring to $130 at the beginning of the week but trades back below $110 on Friday.

The S&P 500 fell about 2.9% for the week. Energy stocks were the top performer, up nearly 1.9% and the only major sector positive.

Fed first

The impact of Russian sanctions on commodity markets and the lack of clarity surrounding the outcome of the war in Ukraine is likely to fuel volatility in financial markets.

The central bank’s statement and comments from Fed Chairman Jerome Powell on Wednesday will be closely watched for guidance on how central bank officials view the Ukraine crisis, and how it may affect affect their outlook and the path of interest rates.

“His guidance will probably be no different from all that what he has to say inside [congressional] testimony. Fundamentally, downside risks to the growth outlook have increased, downside risks to inflation have increased,” said Mark Cabana, head of US short-term rate strategy at Bank of America. .

Because Russia is a huge commodity producer, its attack on Ukraine and sanctions sparked a rally in commodity markets that ignited already smoldering inflation. February Consumer price index increased by 7.9%and economists say rising gasoline prices could take it above 9% in March.

Gas at the pump has increased by nearly 50 cents in the past week to $4.33 per gallon of unleaded, according to AAA.

Market experts see rising inflation as a catalyst for the Fed to continue raising interest rates. However, uncertainty about the economic outlook could also mean the central bank may not raise as many as the seven rate hikes some economists forecast for this year.

Cabana forecasts that Fed officials will forecast five hikes in 2022 and four more next year. The Fed had previously predicted three hikes in both years. Cabana said the Fed could cut its forecast for 2024 to just one increase from the two in its last outlook.

Any comment from the Fed on plans for its nearly $9 trillion balance sheet will also be important, as officials have said they want to start scaling again this year after start raising interest rates. The Fed replaces maturing Treasuries and mortgages as they are issued, and it could slow down what Wall Street calls “quantitative tightening” or QT.

“That they will be ready to move to QT in May is our base case, but we acknowledge there are risks that this will go awry later on,” Cabana said. He said if the Fed finds it is unlikely to raise rates as much as it hopes, it could delay the immediate balance sheet contraction, which would lead to more accommodative policy.

Liquidity in the bond market

The 10 year treasury Yields hit 2% at their highest on Friday, after falling below 1.7% earlier this month as investors sought safety in bonds. Bond yields move inversely with prices.

“It’s inflation and inflation expectations. Treasury behaves in this environment a little differently than it does in flight to quality assets,” Cabana said. You may see a flight to Bank quality, but Treasuries reflect higher inflation expectations.”

Cabana said markets are showing signs of concern around the volatile situation in Ukraine. For example, the Treasury market is less liquid.

“We’ve noticed that the Treasury market has become more volatile. We’ve seen the bid-ask spread widen. Some traditionally less liquid parts of the market could become illiquid. more, like TIPS and 20 Male. “We are also seeing increasingly thin market depth,” he said. It’s all due to increased uncertainty and a lack of willingness to take risks among market participants and I think that should worry the Fed. “

But Cabana said the markets are not showing great stress.

“We don’t see any sign that the wheel is shrinking or the counterparty credit risk is increasing. But there are plenty of signs that all is not well,” he said.

“The other thing that we continue to watch loosely is the funding markets and those funding markets are showing a real premium to the dollar. People are paying a lot to have them. dollars in a way they haven’t had since Covid,” he said.

Cabana said the market is seeking reassurance from the Fed that it is watching the conflict in Ukraine.

“I think it would upset the market if the Fed reflected a very high level of confidence in one direction or another,” he said. “That seems very unlikely.”

Cuong dollar

The dollar index was up 0.6% for the week and it was up during Russia’s attack on Ukraine. This index is the value of the dollar against a basket of currencies and is heavily weighted against the euro.

Marc Chandler, chief market strategist at Bannockburn Global Forex, also pointed out that the dollar funding market is experiencing some pressure but it is not.

“The dollar is at a five-year high today against the yen. That’s not what you would expect in a risk-on environment,” he said. “It’s a testament to the strength of the dollar.”

Chandler said it is possible the dollar will weaken next week if it follows the usual rate hike textbook.

“I think there might be an actual buy-and-sell rumour into the Fed,” he said. “It’s typical for the dollar to rise before the rate hike and sell-off afterwards.”

Boiling oil

Oil has been volatile over the past week, hitting a high not seen since 2008 as the market fears there won’t be enough oil supply due to sanctions on Russia. Buyers have shied away from Moscow’s oil for fear of facing financial sanctions, and The US said it would ban purchases of Russian oil.

West Texas Intermediate crude futures contract rose to $130.50 a barrel at the start of the week but on Friday traded at $109.33.

“I think it’s a bit early for the market to get bids up to $130,” said Helima Croft, head of global commodity strategy at RBC. , note the US ban on Russian oil. She said Monday’s rally comes as market players speculate that there will be a broader embargo on Russian oil, including from Europe, the country’s main customer.

“Right now, the market is way too extreme both ways. I think it’s reasonable at $110. I think it’s more than $100. I don’t think we’re coming to a skewed segment and I think we have room to go higher,” she said.

Week-by-week calendar


Income: Vail Resort, Coupa software


FOMC meeting begins

Income: Volkswagen

8:30am PPI

8:30 create Empire State

4:00pm TIC . data


Income: Lands’ End, shoe festival, DouYu, Lennar, PagerDuty

8:30 am Retail

8:30am Import price

8:30 a.m. Business Leaders Survey

10:00 am Business inventory

10:00 am NAHB survey

2:00 pm Federal Reserve rate decision and economic forecasts

2:30 p.m. Federal Reserve Chairman Jerome Powell’s Briefing


Income: FedEx, Accenture, commercial metals, Signet JewelersDollar General. Design brand, Warby Parker

8:30 a.m. Initial Jobless Claims

8:30 a.m. Housing starts

8:30 a.m. at Philadelphia Fed manufacturing

9:15 am Industrial production


10:00 am Selling an existing house

2:00 p.m. Chicago Fed President Charles Evans

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