07 Apr

The US Federal Reserve is preparing to reduce its balance sheet

April 7, 2022

by JustForex

On Wednesday, US stock markets opened lower again, intensifying the decline. Another FOMC official, Harker, said yesterday that he expects the Fed’s balance sheet to reduce soon. “I see US GDP growth slowing to about 3% – 3.5% this year. I don’t see high inflation going away quickly. High fuel prices will be with us for a while,” Harker added. Later comments were echoed by Kansas City Fed President Esther George and San Francisco President Mary Daley. Deutsche Bank analyst concluded that there is now a high risk of a recession in the US economy in 2023 as the Fed is forced to raise interest rates above their neutral level to lower inflation.

The March FOMC minutes showed that the Fed had made significant progress, and the Committee had a good opportunity to begin the process of reducing the balance sheet after its meeting in May.

The dollar index continued to rise, and US government bond yields also rose amid the growing bias of the Fed’s hawkish monetary policy. Now the Fed plans to raise interest rates aggressively and is also going to reduce the balance sheet from the summer. It’s a double tightening. Withdrawal of liquidity from the financial system is good for the dollar index and bad for stock indices.

At the end of the day yesterday, the Dow Jones Index (US30) decreased by 0.42%, the S&P 500 Index (US500) fell by 0.97%, and the NASDAQ Technology Index (US100) lost 2.22%.

The US Treasury Department has banned US banks from making dollar payments on Russia’s sovereign debt. The US blocked Moscow’s access to frozen money shortly before the deadline for the largest payments – $552.4 million. On April 4, Russia was to repay its debt on Russia-2022 and Russia-2042 Eurobond issues. As a result, Russia was unable to make payments on bonds. There was a grace period of 30 days, after which there may be a technical default.

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European stock markets closed in the red zone yesterday. The German DAX (DE30) decreased by 1.89%, French CAC 40 (FR40) lost 2.21%, Spanish IBEX 35 (ES35) lost 1.64%, and British FTSE 100 (UK100) fell by 0.34%.

On Wednesday, the International Monetary Fund suggested that rising inflation risks could prompt the Swiss National Bank to abandon its ultra-soft monetary policy. “After a long period of very soft monetary policy – a discount rate of -0.75% since 2015 – it may be time to normalize monetary policy,” the IMF said.

The UK is following the US in imposing sanctions on Russia:
  • Sanctions against eight Russians, including Boris Rotenberg, Gazprombank head Andrey Akimov, Novotek co-owner Leonid Mikhelson, and major Akron owner Vyacheslav Kantor.
  • The assets of Sberbank and Moscow Credit Bank are completely frozen.
  • Ban on imports of Russian iron and steel products.
  • Ban on new investment in Russia.
  • Ban on exports of oil refining equipment to Russia.

Russia is threatening Finland with “retaliatory measures” if it joins NATO.

Marine Le Pen’s chances of winning France’s presidential election have risen sharply in recent days as a far-right anti-EU leader has taken advantage of falling living standards due to skyrocketing inflation. Over the past month, Macron has reduced his lead over Le Pen in the bilateral fight from 15% to just 3%. The first round of voting will take place on Sunday.

US crude oil inventories rose unexpectedly by 2.4 million barrels over the week. The increase in inventories has led to lower oil prices. Analysts’ opinions on oil are now divided. On the one hand, with the release of strategic oil reserves by the US and its allies, oil prices are not expected to rise. On the other hand, the demand deficit is still high and may further widen if European countries start to impose an oil embargo on Russia.

On Thursday, Asian stocks fell on a global sell-off as markets were frightened by more aggressive statements from US policymakers about the need to tighten monetary policy. Japan’s Nikkei 225 (JP225) decreased by 1.58%, Australia’s S&P/ASX 200 (AU200) lost 0.50%, and Hong Kong’s Hang Seng (HK50) fell by 1.87%. Japan is lifting an entry ban on 106 countries this week, including the US, Britain, France, Germany, and Canada.

Main market quotes:

S&P 500 (F) (US500) 4,481.15 -43.97 (-0.97%)

Dow Jones (US30) 34,496.51 -144.67 (-0.42%)

DAX (DE40) 14,151.69 -272.67 (-1.89%)

FTSE 100 (UK100) 7,587.70 -26.02 (-0.34%)

USD Index 99.65 +0.18 (+0.18%)

Important events for today:
  • – Switzerland Unemployment Rate (m/m) at 08:45 (GMT+3);
  • – German Industrial Production (m/m) at 09:00 (GMT+3);
  • – Eurozone Retail Sales (m/m) at 12:00 (GMT+3);
  • – Eurozone ECB Monetary Policy Meeting Accounts at 14:30 (GMT+3);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
  • – US FOMC Member Bullard Speaks at 16:00 (GMT+3);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+3);
  • – US FOMC Member Williams Speaks at 23:05 (GMT+3).

by JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.


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