Global equities declined on Wednesday while the Treasury curve steepened after the minutes from the FOMC made it clear they will move quickly to reduce the balance sheet and raise rates.
The minutes from the March meeting showed “many” officials preferred to raise rates by +0.50%, refraining only due to the war in Ukraine. “Many participants noted that — with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level—they would have preferred a 50-basis point increase in the target range for the federal funds rate at this meeting”. On the balance sheet, the Federal Reserve will reduce bond holdings by a maximum of US$95 billion per month, split at US$60 billion in Treasuries and US$35 billion in mortgage-backed securities while maintaining a degree of flexibility with caps potentially “phased in over a period of three months or modestly longer if conditions warrant”. Pricing based on Fed Fund futures is now closer to pricing in 9 more rate hikes in 2022, bringing the implied Fed Funds rate to +2.17% with a growing probability of a +0.50% hike at each of the next three meetings.
The S&P500 weakened -0.97% weighed by technology -2.55% and consumer discretionary -2.63% while health care +1.55% and consumer staples +1.39% outperformed in mixed breadth with 44% of stocks rising. The Dow Jones also declined -0.42%, as did the Nasdaq Composite -2.22% and Russell 2000 -1.42% with the VIX climbing +5.09% to 22.10. The 2-year Treasury yield declined -4.7 basis points to 2.469%, while both the 10 and 30-year rates rose +5.1 and +5.3 basis points respectively while breakeven inflation rates declined across the curve on expectations a more aggressive Fed would bring down high inflation levels.
European equities were broadly lower amid concerns of slowing growth and rising inflation, while the French Presidential race continued to add to volatility. The Euro Stoxx 600 declined -1.53% weighed by industrials -2.48%, consumer discretionary -3.47% and technology -3.63%. The DAX also weakened -1.89%, as did the CAC -2.21% and FTSE100 -0.34% with major benchmarks lower across the region. Adding to concerns of slowing growth, German construction PMI for March declined to 50.9 from 54.9 previously, only modestly in expansionary territory. With rising commodity prices and sentiment weighed by the war in Ukraine, a tightening French Presidential election adds another layer that is likely to drive volatility through headlines over the coming weeks. 110-year bond yields were higher across the region, echoing moves in the U.S. ranging from +12.8 basis points in Sweden to +3 basis points in France.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a modestly weaker open this morning with ASX200 futures down -16 points or -0.22% to 7,439. The index declined -0.50% on Wednesday with a +0.70% gain in financials offset by a -1.52% fall in materials and -2.88% decline in technology. The best performer for the session was Whitehaven coal with shares jumping +5.5% over expectations of sanctions by Europe over Russian coal. Banks received a boost after yields rose following more hawkish language from the RBA on Tuesday with CBA rising +1.3%, as did NAB +1.2%, ANZ +1.2% and WBC +0.8. The Australian dollar is -0.88% weaker overnight at 0.7509 and the yield on 10-year government bonds rose +7.6 basis points to +2.931% on Wednesday.
Oil prices declined as U.S. crude inventories rose more than expected with both WTI and Brent crude -5.62% and -4.78% lower at US$96.23 and US$101.54 a barrel. Data on Wednesday showed U.S. crude inventories climbed +2.421m barrels versus -2.8m expected, partially offset by a larger decline in gasoline inventories of -2.041m barrels versus -400k forecast. Iron ore futures in Singapore weakened -1.32% on Wednesday and are a further -1.34% lower this morning at US$159.20. Gold edged +0.09% higher to US$1,925.35 despite a rise in real yields, silver also rose +0.57% to US$24.46 while Bitcoin fell -4.32% to US$43,885.
Economic data:
- Australian Services PMI (MoM Mar) 08:30
- Eurozone Retail Sales (YoY Feb) 19:00
- ECB Monetary Policy Minutes 20:00
- U.S. Initial Jobless Claims (2nd Apr) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
