Daily Market Update

The Fed has finally put balance sheet reduction on the table and from the market's reaction, it looks like it was earlier than expected. Vice-Chair Brainard's comments overnight indicated it could start reducing the size of its balance sheet as soon as the next meeting - not reinvesting proceeds from maturing debt it had bought as part of QE or possibly selling it in the market (less likely). She declined to comment on whether a 50 bp hike was coming though. Another voting member of the FOMC, George, said that a hike of that magnitude was an option at the next meeting. Deutsche Bank has become the first big name to call for a recession next year, seeing the fed funds rate at 3.5% by mid-2023.

Equities were lower as they reversed the gains from the prior session and then some. SPX declines were led by Tech and Discretionary names with the Energy sector dipping alongside Crude as well. Natural gas futures were up and so were US coal producers after the EU proposed a ban on Russian coal imports (not gas though). US gasoline prices are at a multi-decade high with the volatility in Crude and keeping headline inflation elevated as well - big Oil CEOs have been summoned before Congress today for some political theatre.

The US is expected to announce new sanctions on Russian financial entities and people close to the Kremlin. Russia's 5Y CDS prices in the probability of default at 90% now. Zelensky, in his address to the UN yesterday, urged Security Council members to stop Russia from abusing its veto powers. US called for Russia to be suspended as well, though follow-through is unlikely.

US yield curve gyrations were alive and well with volatility hitting new highs here. The 10Y yield rose to 2.6%, almost closing the gap to the 30Y and the 5Y went up the 2.75% level. The 2s10s are no longer inverted but the 2Y is sitting right below the 2.6% level as too, a multi-year high there. The US dollar rose alongside yields and support levels in Crypto are broadly holding up for now. We have a NATO foreign ministers meeting in Brussels today and US weekly crude inventories later in the day.

Have a great day ahead

“The function of economic forecasting is to make astrology look respectable.”

John Kenneth Galbraith