U.S. equities declined on Tuesday while Treasury yields surged following hawkish comments from Federal Reserve Governor Lael Brainard.
Brainard said the central bank will continue to tighten policy methodically while shrinking its balance sheet as soon as May at a rapid pace. “Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19”. Brainard also noted “inflation it much too high and subject to upside risk”, while adding they are “attentive to signals from the yield curve at different horizons and from other data that might suggest increased downside risks to activity”.
The comments come ahead of the release of the minutes from the Federal Reserve’s last meeting overnight tonight, and investors will be looking for further clues about how rapidly the bank plans to increase rates and reduce its balance sheet. The S&P500 fell -1.26% weighed by technology -2.19% and consumer discretionary -2.35% with 70% of stocks trading lower. While market commentators attribute the move to Brainard’s hawkish comments, the view that inflation is too high and tighter monetary policy is needed is in line with recent expectations and there is evidence that markets had become stretched from a technical perspective following an +11.4% rally from mid-March to recent highs. Elsewhere the Dow Jones also weakened -0.80%, as did the Nasdaq Composite -2.26% and Russell 2000 -2.36% with the VIX climbing +13.25% to 21.03.
Treasury yields moved higher across the curve with the 2-year yield up +10.2 basis points to 2.524%, as did both the 10 and 30-year rates by +15.7 and +12.6 basis points respectively. While breakeven inflation rates rose across 5 and 10-years by +3.4 and +4.7 basis points respectively, being lower than the move in nominal yields pushed real yields higher across the same periods by +11.9 and +11.2 basis points to -0.655% and -0.302%. Meanwhile, financial conditions have recently eased followed a tightening from record lows. In economic data, the ISM non-manufacturing PMI for March was in line with estimates, rising to 58.3 from 56.5 previously. The reading shows growth accelerating in March and the U.S. economy remains on solid footing, although commentary was less upbeat noting ongoing supply-chain challenges, rising inflation and increased uncertainty.
European equities were mixed as investors weighed the potential for further sanctions on Russia including proposing a ban on coal imports, while French equities underperformed after a poll showed a tighter than expected Presidential race. Far-right candidate Marine Le Pen looking likely to make the April 24th runoff against Emmanuel Macron and while polls predict a victory for Macron, the gap is tightening. The Euro Stoxx 600 rose +0.19%, as did the FTSE100 +0.73% and IBEX +1.20% while the DAX and CAC declined -0.65% and -1.28% respectively. In economic news, the final reading of Eurozone services PMI for March edged higher to 55.6 from 55.5 previously, beating estimates of a decline to 54.8 with composite PMI rising to 54.9 from 54.5 previously, also above estimates of 54.5.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open lower this morning with ASX200 futures down -54 points or -0.72% to 7,443. The index pared earlier gains to finish +0.19% higher following a hawkish tilt from the Reserve Bank of Australia at the conclusion of its monetary policy meeting on Tuesday. The hawkish tilt came in the form of removing the language of being “patient” and its commitment to maintaining highly supportive monetary conditions as the bank signalled it could begin raising rates as soon as June, in line with market pricing. Lowe noted rising inflation was putting pressure on household budgets with “ongoing supply-side problems, Russia’s invasion of Ukraine and strong demand as economies recover from the pandemic are all contributing to the upward pressure on prices,”. Pricing based on futures shifted slightly higher to be pricing in a 0.25% rate hike at each meeting from June to the end of 2022, estimated to bring the cash rate to 1.916%. The Australian dollar climbed +0.46% to 0.7578 while the yield on 10-year government bonds climbed +2.3 basis points to 2.855%.
Oil prices were lower overnight as prices continue to consolidate within a narrowing range following recent gains, often such tightening periods of consolidation are followed by a sharp breakout. Both WTI and Brent crude traded -2.50% and -2.01% lower to US$100.69 and US$105.40. Iron ore futures in Singapore weakened -0.14% on Tuesday and are a further -0.68% lower this morning at US$162.40. Gold declined -0.49% to US$1,923 with silver also -0.87% lower at US$24.32 as was Bitcoin -1.30% at US$45,708.
Economic data:
- Chinese PMI (MoM Mar) 11:45
- FOMC Minutes 04:00
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.
