May Market Commentary: The Fed Owned It, But Can They Control It?

April Recap and May Outlook

COVID concerns took a definitive backseat as mask mandates on flights ended, and the concerns about the economy turned to how bad things will get. The concerns over the disruption of the ongoing war in Ukraine, 40+ year record inflation, and the resulting amping up of the Fed’s intentions on rate increases moved distinctly into the foreground. Let’s look at some headlines:

  • The IMF released projections for the impact of the war in Ukraine. Global growth will likely slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.

  • The war isn’t just impacting growth. The IMF also reported that war-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.

  • In remarks at a panel discussion at the IMF on April 21st, Chairman Powell reiterated that it is appropriate “to be moving a little more quickly” on rate hikes. That translated into guidance on the first 50-bps rate increase in 22 years.

  • Economists began talking about “stagflation.” Stagflation is high inflation, high unemployment, and slow or negative real economic growth. Stagflation fears rise out of the potential for the Fed to overshoot and tip the economy into recession. Another way to think of stagflation is a circular firing squad. In stagflation, the moves the central bank makes to rescue the economy push it further into recession.

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March Market Commentary: In Like A Lamb, Out Like a Lion?

March Recap and April Outlook

Ukraine’s fierce response to and subsequent repulsion of Russian troops surprised everyone, not least Vladimir Putin. As March came to a close, negotiations were beginning to be more realistic, and the evidence on the ground was that Russia was retreating and reassessing.

The Federal Reserve held the monthly FOMC meeting and raised the key short-term interest rate by 25 basis points. What wasn’t expected was Fed Chairman Powell’s subsequent remarks about the pace of rate increases. Powell has worked to be transparent and proactive in communicating the Fed’s intentions.

The change in the pace of rate increases was clear in his language that “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.”

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February Market Commentary: Action and Reaction

February Recap and March Outlook

February opened with a strong January employment number as the Bureau of Labor Statistics reported an increase of 467,000 jobs. Instead of reassuring markets after a rough ride in January, it only served to fuel speculation that a strong labor market would lead the Federal Reserve to be more aggressive with rate increases than previously indicated, in its attempts to control inflation. The release of the January average annual inflation number of 7.5% in mid-February proved to be a shock to system.

Overnight, futures markets began pricing in a 50-basis point increase in March, and the two-year U.S. Treasury yield gained 24 basis points. This flattened the yield curve as the ten-year U.S Treasury struggled to get to 2%. The next step after flattening is to invert – which is usually interpreted as a sign of an impending recession. Investors’ worry was that more aggressive Fed rate increases would overshoot and stifle growth.

This was the backdrop as Russia’s saber-rattling in Ukraine, and the West’s telegraphed response of the threat of sanctions, unsettled markets further. And then Russia invaded.

Ukraine Defies Putin, and Defines Heroism

Stiff Resistance Provided a Window for Coordinated Western Action

Ukrainian President Volodymyr Zelenskyy’s reaction to the U.S. offer of help in evacuating his country was the now-famous “I need ammunition, not a ride.” Ukrainian soldiers rejected surrender with “Russian Warship: Go F*** Yourself.” And ordinary Ukrainians stood in front of tanks, or just simply kept going to work, despite the bombs and alarms.

The U.S. and the E.U. responded with incredibly harsh sanctions. The sanctions playbook has been fine-tuned since last fall, and officials in many countries have had time to build the trust needed to impose sanctions that can counteract Putin’s long-honed measures to insulate the Russian economy from the impacts of Russian aggression.

  • Western leaders have frozen the assets of Russia’s central bank, limiting its ability to access $630bn of its dollar reserves.
  • The US, the EU and UK have also banned people and businesses from dealings with the Russian central bank, its finance ministry and its wealth fund.
  • Selected Russian banks will also be removed from the Swift messaging system, which enables the smooth transfer of money across borders. The ban will delay the payments Russia gets for exports of oil and gas.
  • Sanctions are targeting Putin personally, and his oligarchs.

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