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Federal Reserve expected to raise interest rates in week ahead

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Trader at the NYSE on March 11, 2022.

Source: NYSE

The Federal Reserve’s first postpandemic interest-rate hike may prove to be an easy sell for investors, even though markets continue to remain exposed by uncertainty about Ukraine.

That is what the Fed clearly stated. it intends to raise its target fed funds rateThe central bank will reduce its target rate by one quarter percent from zero and announce this decision at Wednesday’s end of the two-day meeting. New forecasts by the central bank for inflation, interest rates and economic growth should be made.

The week ahead will include the Producer Price Index Tuesday, Retail Sales Wednesday, and Existing Home Sales Friday.

“Earnings have ended. This is where the importance of monetary policy will be. Steve Massocca (Managing Director at Wedbush Securities) said that he doesn’t expect the Fed to surprise anyone next week. It’s only going to take a quarter of a point, then you can step back and observe what’s taking place in Europe.

Stocks dropped for the week with the Nasdaq CompositeThe worst performer was the Russell 2000, which saw a decline of 3.5%. The Russell 2000 small-cap index, which performed better than the other majors, dropped 1% over the same week.

Investors were frightened by a surge in oil prices, which saw crude rise to $130 at the beginning of the weekBut trading was back to $110 by Friday

It S&P 500The week’s decline was 2.9%. With an increase of nearly 1.9%, energy stocks were the best performing sector. They are also the most positive major.

Fed in the future

Volatility will continue to rise across financial markets due to uncertainty surrounding the outcome of war in Ukraine and Russian sanctions on commodity markets.

Federal Reserve Chairman Jerome Powell’s comments Wednesday on Wednesday on Ukraine will be carefully watched to see how Fed officials perceive the crisis. It could also influence their outlook on interest rates and affect the direction of future policy.

“His direction is likely to not be much different.” what he had to sayIn the [Congressional] testimony. The upside risks to the outlook for growth have increased. “Inflation risks have increased,” stated Mark Cabana from Bank of America, Head of U.S. Short Rate Strategy.

Russia is an enormous commodity producer its assault on Ukraine and resulting sanctionsThe rally has triggered a surge in commodity markets, which has made already-hot inflation more intense. February’s consumer price index was up 7.9%Economists believe that rising gasoline prices will push it over 9% by March.

Petroleum at the pump has risen nearly 50 cents to $4.33 per gallon unleaded over the past week. according to AAA.

According to market pros, rising inflation is a positive sign that the Fed will continue raising interest rates. Uncertainty about economic prospects could mean that the Fed might not raise interest rates as often as some analysts predict.

Cabana believes that Fed officials will forecast five more hikes in 2022, and four additional next year. The Fed had previously predicted three more increases for both years. Cabana indicated that they could reduce their forecast for 2024 by one increase, after predicting two increases in each year.

The Fed will be providing comments on its $9 trillion-plus balance sheet. Officials say they are keen to reduce it this year, after increasing interest rates. Wall Street calls this “quantitative tightening”, or QT. The Fed will replace maturing Treasury bonds as they are rolled off and could slow down that process.

Cabana said, “That they’ll be ready in May to turn the switch on QT is our base case.” However, he acknowledged that there could be issues later. If the Fed does not feel it can raise interest rates at the level it hopes, the Fed could delay the shrinking of the balance sheet. This would allow for looser policy.

Bond market liquidity

It 10-year TreasuryAfter falling below 1.7% in the previous month, Friday’s yield reached 2%. The yield of bonds moves in opposite direction to the price.

It is inflation expectations and inflation. This environment is different from a flight of quality assets. Treasurys react differently to this, Cabana stated. “That’s an entirely new dynamic that we have observed.” Although you may notice a higher level of inflation in the Treasurys, it is possible to see quality assets moving into Treasurys.

Cabana indicated that the market is showing concern over the uncertainties in Ukraine. The Treasury market, for instance is less liquid.

We’ve seen volatility in the Treasury markets. The spread between bid and ask has widened. There are some parts of the market that have been less liquid in the past, including TIPS or the 20-year.He said that we are also witnessing market depth shrinking.” “This can be attributed to market participants’ increased uncertainty and their lack of willingness and ability to take on risk, which should concern the Fed,” he said.

Cabana stated that markets don’t show major stress.

We are not seeing any signs that the funding wheels may be falling or that the counterparty credit risk is high. He said that there were many signs that everything is not going well.

We continue to monitor funding markets and they are showing real premiums for dollars. He said that people are willing to pay a premium for dollars, which is something they’ve not done since Covid.

Cabana stated that the market wants to be reassured by the Fed about its monitoring of the Ukraine conflict.

He stated that if Fed showed a high level of confidence in any direction, it could upset the markets. This seems highly unlikely.

Strength of the dollar

It was 0.6% higher than the previous week, and has been increasing since Russia’s invasion of Ukraine. This index measures the dollar’s value against a variety of currencies. It is heavily weighted towards the euro.

Marc Chandler is chief market strategist for Bannockburn Global Forex. He also noted that while the dollar funding market may be under some pressure it isn’t overly stressed.

Today’s dollar against the yen is at its highest level in five years. “That’s not something you would expect in risk-off environments,” he stated. That’s an indication of the strength and stability of the dollar.

Chandler stated that it is possible for the dollar to weaken in the next week, if the Fed follows the usual path of increasing interest rates.

“I think there might  be a buy the rumor, sell the fact on the Fed,” he said. It is not unusual for the dollar’s value to rise ahead of the rate increase and then fall after it.

Boil the oil

The market was worried that Russia’s sanctions would cause oil prices to spike and this caused them to yank their oils. For fear of violating financial sanctions, Russian oil has been avoided by buyers. U.S. said it would ban purchases of Russian oil.

West Texas Intermediate crude futuresThe price of a barrel jumped up to $130.50 at the start of the week, but settled Friday at $109.33.

Helima Croft from RBC’s global commodities strategy, stated that “I believe the market being bid up to $130 wasn’t a lot premature.” The Monday price surge was due to speculation by market players that there would be an even wider embargo of Russian oil in Europe.

“Right now the market is far too extreme. It’s reasonable at $110. The price is justified at $100. “I don’t think that we’re heading for an off ramp, and I believe there’s room to go higher,” she stated.

Week ahead calendar

Monday

Earnings: Vail Resorts, Coupa Software

Tuesday

FOMC meeting begins

Earnings: Volkswagen

8:30 a.m.

8:30 a.m. Empire State manufacturing

4:00 p.m. TIC information

Wednesday

Earnings: Lands’ End, Shoe Carnival, DouYu, Lennar,PagerDuty

8:15 a.m.

8:30 a.m. 8:30 a.m.

8:15 a.m. Survey of business leaders

10:00 a.m. Inventory of businesses

10:00 a.m. NAHB survey

Federal Reserve Federal Reserve economic projections and interest rate decisions at 2:20 p.m.

2:30 p.m. Briefing given by Jerome Powell, Chairman Federal Reserve

Thursday

Earnings: FedEx,Accenture, Commercial Metals Signet Jewelers, Dollar General. Designer Brands, Warby Parker

8:30 a.m. 8:30 a.m.

8:30 AM Housing Starts

Philadelphia Fed manufacturing at 8:30 AM

9:15 a.m. Industrial production

Friday

10:00 a.m. Existing home sales

Charles Evans, President of Chicago Fed

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