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Global Stocks Fall as Yields Rise, Inflation Expected to Increase Again
Last Week Review
Global equities declined 1.4% last week on the war in Ukraine and inflation. Emerging market equities declined 1.4%, followed by U.S. equities (-1.7%) and developed ex-U.S. equities (-1.4%). Following the prior week’s Treasury yield curve inversion that historically triggers fears of recession, the inversion unwound last week as the 10-year yield surpassed the two-year yield. The 10-year yield rose 0.32% to 2.70% and the two-year yield rose 0.06% to 2.51%. The 10-year German Bund yield rose 0.15% to 0.70%. Interest rates have risen to new recent highs while major central banks attempt to balance the opposing forces of sticky inflation and downside economic risks from the Russia-Ukraine war.
Europe, U.S. Tighten Sanctions on Russia
Evidence of Russian atrocities have led to less room for peace talks and potentially more sanctions. Some European Union nations called for a full Russian oil ban, but pushback from other member nations makes a blanket oil ban difficult. Instead, Europe proposed a ban on Russian coal imports, which is not a massive disruption to Europe’s overall energy supply but attention-worthy given it’s a step closer to more disruptive energy sanctions. The U.S. ratcheted up its own sanctions, including restrictions on Russian President Vladimir Putin’s daughters and a ban on new investments into Russia. These sanctions aren’t too severe, but they highlight the ongoing risks of the still-evolving sanctions.
Fed Outlines Balance Sheet Goals
Federal Reserve Vice Chair Lael Brainard’s comments ahead of the release of last week’s Fed meeting minutes suggested a more aggressive course of quantitative tightening than investors had been anticipating. The Fed minutes confirmed the central bank’s hawkish-leaning balance sheet reduction plans, in which the Fed would sell bonds on the open markets to potentially increase interest rates. It will cap monthly reduction at $95 billion per month over three months. For comparison, in 2017 the Fed capped monthly reduction at $50 billion and phased in that reduction pace over a year. Additionally, the minutes noted that many Fed officials were inclined to hike by 0.50% in March. In response, equities fell at the expense of a higher 10-year Treasury yield. The European Central Bank’s (ECB) also released the minutes of its March meeting, which showed mixed opinions on a rate hike following the end to its quantitative easing program later this year. The ECB has become increasingly hawkish but remains cautious given war-related growth risks.
China’s Faltering Economy Offsets Pickup in Developed Regions
Developed region Purchasing Managers’ Index (PMI) data underscored a global pickup in services activity on the back of waning COVID-19 restrictions. However, China’s composite PMI collapsed well into contractionary territory. The drop mainly reflects China’s economic challenges from ongoing COVID lockdowns.
This Week Preview
Political Risk Is High as War in Ukraine Continues
The devastating conflict continues in Ukraine. Secondary sanctions placed on nations that support Russia remain a possibility. India is under scrutiny for Russian oil purchases while China remains under the watch of the U.S. Meanwhile, investors will react to the results of the first round of the French presidential election. Incumbent Emmanuel Macron is the favorite, but there is some risk of an adverse investor reaction should far-right opponent Marine Le Pen pulls off an upset.
Inflation May Rise Again
The U.S. Consumer Price Index (CPI) report on Tuesday is expected to show an 8.4% year-over-year inflation in March from 7.9% in February. Core CPI is expected to rise to 6.6% from 6.4%. Sticky inflation is complicating Fed strategy, requiring the central bank to restore price stability without inflicting longer term economic pain. Several Fed leaders are scheduled to speak throughout the week. The ECB and Bank of Canada are set to make monetary policy decisions. The ECB is not expected to make major policy changes while the Bank of Canada is expected to raise rates again.
JPMorgan, Wells Fargo and Goldman Sachs to Report Earnings
JPMorgan (JPM) on Wednesday will report second quarter earnings. Financial companies Wells Fargo (WFC), Citi © and Goldman Sachs (GS) will follow on Thursday. Investors project U.S. earnings to grow 6% year-over-year, with revenues up 10%.
Sources: media reports, Bloomberg for data
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