The Morning Hark - 7 Apr 2022
Today’s focus ……..Digesting the Fed minutes with Dudley’s thoughts
Daily roundup - all prices are at 7.50 BST with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures up over a percent for the session at 102.45 and 97.50 respectively. Oil regained some of its poise overnight after a rout of a session on Wednesday. The main catalyst for the sell off was an announcement from the IEA of a release of 60m to go alongside the US’s earlier commitment to 180m barrels. However, as we have discussed before with a daily global consumption of 100m this will hardly touch the sides and indeed these emergency stocks will have to be restocked at some point in the future putting further strain on the forward market. In addition talks between the US and Iran on reviving the nuclear pact have stalled preventing any immediate hope of a lifting of sanctions on Iranian oil.
EQ - Asian equity markets softer across the board following the post Fed sell off in the NY session. The Hang Seng and the Nikkei down over a percent at 21,880 and 26,900 respectively. European and US futures also soft on the session. It seems that the equity markets are now taking stock of the Fed talk and as we have discussed over the last few weeks the balance sheet reduction seems to have been the piece of news that wasn’t being digested fully. The minutes yesterday left the market in no doubt as to what the Fed intends to do and indeed how quickly. The S&P and Nasdaq are approaching some key supports and psychological levels. Near term supports are seen at 4,400 and 14,400 with next at 4,400 and 14,000 the sort of nice round numbers that market’s tend to like.
Gold - Futures flat on the session at 1925.
FI - Where to start! Quite the round trip for the US rates market this week. The 10y has seen a near 30bp rally from Monday’s lows to a high above 2.65 yesterday and has since backed off to the 2.57 level. Equally the 2y and 30y have seen similar magnitudes of moves form the weekly lows to the highs of 22bps and 24bps respectively. As we alluded to above and previously the rates expectations were pretty much in the price but the balance sheet roll off part is starting to sink in. The market looks set for a period of consolidation and pull back given the speed and magnitude of the moves.
FX - Compared to the fixed income and equity space FX has been a bit of a sideshow. The US Index, the dollar based against a basket of other major currencies, was down tiny overnight after hitting a near 2 year high overnight post Fed at 99.77. The main losers were the AUD and NZD both down close to half a percent on little news of note.
Others - Bitcoin continues to trade softer as has been the trend all week and with other risk assets suffering it has decided to come out in sympathy with them. Currently at 43,450 and we are firmly back in that range we saw for much of March. The thoughts of a breach of the 50,000 level look for now look distant.
The volatility measures for equities (VIX) and rates (MOVE) again trade independently. The MOVE unsurprisingly pushed higher closing close to 124 and the VIX closed flat at 22.10. Given the key supports we are close to and the Fed’s hawkish and forthright determination to get rates up and the balance sheer reduced it seems a bit of a disconnect that the VIX is so calm.
All eyes East in Ukraine as the Donbas region looks set to become the focus of the war over the next few days after the recent regrouping of the Russians away from Kyiv which has now seen a complete withdrawal. The UK and US issued new sanctions yesterday targeting banks and banning investments into the country with the EU continuing to debate its next step but expected to follow today at some point. With the above backdrop and the distressing reports and scenes coming out of the once controlled Russian areas of Ukraine diplomacy seems to have taken a back seat for now and the war looks set to rumble on albeit in a more targeted area of the country.
Elsewhere the main focus of the week did not disappoint with the release of the Fed’s minutes for March. The main focus centred around the details for the balance sheet reduction:
Monthly runoff target of $60bn Treasuries and $35bn mortgage backed securities;
These caps to be phased in over a 3 month period or modestly longer as the market allows;
Will start potentially as soon as the early May meeting; and
Will undo its quantitive easing program with quantitive tightening by not replacing maturing assets but may consider actively selling MBS.
Compared to the last quantitive tightening program back in 2017 this is a near doubling of the monthly target.
On the rates front 50bps was seen by many as an appropriate step in the fight against inflation and many would have voted for such a hike in March if it were not for the geopolitical situation in Ukraine. The USD rates curve is all but secured a 50bp hike for the early May meeting and at one point yesterday there were close to 11 hikes for 2022 in the curve.
A fair amount of commentary on will the Fed be able to execute the soft landing they hope for whilst neutralising rates, taming inflation, reducing the balance sheet but prevent market mayhem and hopefully avoiding a recession. It’s fair to say there’s a fair amount of scepticism out there and who can blame the analysts given that to-do list. A lot of focus has been on the former NY Fed chief Dudley’s comments in a Bloomberg article. His opinion is that inflation will be hard to tame without some investor suffering. His belief is that the Fed will continue raising rates until such time as investors do suffer and this will act as a key tool in fighting further inflation risks. If this indeed is the case then this would be in sharp contrast to previous attempts by the Fed to get rates back into a more neutral territory whereby they have even reversed course in their hiking path due to stock market crashes. Thus far the pain has been in the fixed income space so it will be interesting to see, when this pain tips over into the stock market, any comments from Fed speakers to support Dudley’s view or otherwise.
📅⠀The main highlights for the day in terms of data and speakers:
US claims data at 13.30 BST.
Fed speakers with Bullard at 14.00 BST and Bostic and Evans at 19.00 BST. Obviously the market will pay close attention to any clues as to the specific speakers thoughts of 50bp for May or comments on the balance sheet reduction. Although there seems more than enough to digest for now!
ECB minutes at 12.30 BST. These minutes are from the March meeting where the ECB accelerated their tapering process despite the conflict in Ukraine. The notes hopefully will give some clues as to the thoughts of the various members as to why they took this stance. Details on growth and inflation forecasts will also be key.
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📚⠀Articles on Harkster and from outside exploring in more depth some of the themes above:
Bitcoin and tax season
MacroTactical Crypto - MacroTactical Crypto #15
Bloomberg - Ukraine Is Sitting on 15 Million Tons of Grain it Can't Move
🔥⠀Top 5 trending links on Harkster yesterday:
Blockworks - Zoltan Pozsar Calls For Bretton Woods III | Joseph Wang
The Felder Report - The Fed Just Disengaged Its Volatility Suppression Machine
Doomberg - It’s Time to Move In
Marc to Market - Bonds Meltdown
TS Lombard - Is the US recession inevitable? Always, but not when real rates are negative
Discover more on harkster.com
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