Daily Market Update Apr 7

The Fed minutes overnight showed why Brainard had been laying the ground work for a balance sheet reduction with her remarks the prior day. It was clear the FOMC was eager to be seen as taking back control on inflation and would likely have hiked 50 bps in March had it not been for the situation in Ukraine. The pace of reducing their USD 9 trn balance sheet will also be almost double of the last tightening cycle, with Treasuries at USD 60 mn a month and MBS at USD 35 mn a month. The plan is likely to be approved in the May meeting and phased in over three months. Fed speakers overnight reiterated the case for rapid tightening and almost all Wall Street forecasts are now calling for three consecutive 50 bp hikes before having to scale back next year on recession fears.

The yield curve and Fed fund futures were well behaved overnight with the 2Y and 5Y yields coming off recent highs. Equities were in the red, though sentiment was sour in Asia and Europe even ahead of the Fed minutes. SPX declines were once again led by Tech and Discretionary names, with the Utility sector holding up well in the recent drawdown. The 4500 support level gave way, though the move was fairly orderly. WTI dipped below the 100 level once again after the IEA announced the release of a further 60 mn barrels from the reserves of its 30 other member countries. US supply has reported to increase by 2 mn barrels last week and weekly inventories came in higher than expected overnight.

The US and UK also unveiled more sanctions on Russian banks and the US also sanctioned Putin's daughters. Hungary broke ranks with the EU to announce it would consider paying for Russian gas in Roubles - Orban won a decisive mandate in the election last weekend despite his overt attacks on democracy. The RUB has also returned to pre-invasion levels though the US has warned of significant intervention by Russia in the last couple of weeks. We have the ECB minutes later today which will also be scoured for hints on if a rate hike in 2022 is coming. No surprises are expected from the weekly jobless numbers in the US.

Have a great day ahead

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”

Benjamin Graham