Month-In-Review: April 2022

The March rate hike quickly became yesterday’s news as Fed officials indicated a willingness – and need – to take more aggressive action against “too high” inflation, opening the door for larger rate hikes in the coming months. The market interpreted the latest rhetoric to mean a 50bp increase in May, priced in at near 100% certainty by April 19, and the potential for an even larger increase come June, pushing the 10-year yield up 60bps in April. While a continued backup in inflation with the PCE reaching 6.6% at the end of Q1 justifies the Fed’s more hawkish policy position, an emerging slowdown in domestic activity complicates the Fed’s desire to rein in price pressures without undermining growth.?

Market Activity and Commodities

·??????Equities – Stocks ended sharply lower in April after finishing higher in March. Beginning at 4,530.41, the S&P 500 dropped 8.8% in April, closing at 4,131.93, its worst monthly performance since March 2020. The Dow, meanwhile, fell 4.9% at the start of the second quarter from 34,678.35 to 32,977.21, also marking its worst monthly performance since March 2020 and its worst April performance since 1970. Additionally, the Nasdaq retreated more than 13% in April, closing at 12,334.64. Since the start of the year, the S&P 500 and Dow are down 13.3% and 9.3%, respectively, while the Nasdaq is down 21.2%.

·??????Treasuries – Treasury yields rose in April after also finishing higher in March. The 10-yr Treasury yield climbed 60bps from 2.34% to 2.94 in April after marking a near-term high of 2.94% on the 19th. The 2-yr Treasury yield, meanwhile, ended April up 38bps at 2.72%. Since the start of the year, the 2-year and 10-year are up 199bps and 143bps, respectively.

·??????Oil & Gas????????????

o??(Apr 25) – Oil prices fell after fears of a prolonged lockdown in China intensified due to an uptick in Covid-19 cases. Brent crude fell 4.6% to $101.74 a barrel, and WTI oil prices fell 4.9% to $97.07 a barrel.

National Growth and Outlook

• NFIB Small Business Optimism (Apr 12) – The NFIB Small Business Optimism Index declined from 95.7 to 93.2 in March, more than the fall to 95.0 expected and the lowest reading since April 2020. According to the NFIB, about 40% of U.S. small businesses intend to raise selling prices by 10% or more to absorb higher costs. More than two-thirds of the respondents plan increases in the next three months on top of the roughly 90% who report they have already increased prices.
• Leading Index (Apr 21) – The Leading Index rose 0.3% in March, as expected and following an upwardly revised 0.6% increase the month prior.
• Chicago Fed National Activity Index (Apr 25) – The Chicago Fed National Activity Index fell from 0.54, revised up from 0.51, to a reading of 0.44 in March, in line with the expected decline to 0.45, according to Bloomberg and a three-month low. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In March, 59 of the 85 monthly individual indicators made positive contributions, while 26 made negative contributions.
• GDP (Apr 28) – GDP unexpectedly fell 1.4% on an annualized basis in the first quarter, the first contraction since Q2 2020. According to Bloomberg, activity in the first three months of the year was expected to rise 1.0%. In the details, personal consumption rose 2.7%, up from the 2.5% gain in Q4. Goods consumption fell 0.1%, following a 1.1% rise in Q4, due to a 2.5% decline in nondurable goods consumption. Durable goods consumption, however, rose 4.1%, the largest gain in three quarters. Services consumption, meanwhile, rose 4.3% in Q1, up from a 3.3% increase the quarter prior. Gross private investment, a gauge of business spending, rose 2.3% in Q1, down, however, from the 36.7% jump in Q4. Fixed investment rose 7.3% in the first quarter, the largest gain in a year. Nonresidential investment, including office buildings and factories, increased 9.2%, due to a 15.3% gain in equipment investment and an 8.1% increase in intellectual property investment. Structures investment, however, fell 0.9%, the fourth consecutive quarter of decline. Additionally, residential investment rose 2.1%, following a 2.2% increase in Q4. On the trade side, exports dropped 5.9%, the largest decline since Q2 2020, while imports gained 17.7%. Finally, government consumption fell 2.7%, following a 2.6% decline the quarter prior. Federal spending decreased 5.9%, nondefense spending dropped 2.2%, and national defense spending plunged 8.5%, the fifth consecutive quarter of decline. Also, state and local spending fell 0.8%, following a 1.6% decline the quarter prior.

Employment

• Jobless Claims
• (Apr 7) – Initial jobless claims dropped 5k from 171k, revised down from 202k, to 166k in the week ending April 2, the lowest level since 1968. According to Bloomberg, jobless claims were expected to decline to 200k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.506M to 1.523M in the week ending March 26, a seven-week high.
• (Apr 14) – Initial jobless claims rose 18k from 167k, revised up from 166k, to 185k in the week ending April 9, a five-week high. According to Bloomberg, jobless claims were expected to rise to 170k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, fell from 1.523M to 1.475M in the week ending April 2, the lowest since 1969.
• (Apr 21) – Initial jobless claims fell 2k from 186k, revised up from 185k, to 184k in the week ending April 16, a two-week low. According to Bloomberg, jobless claims were expected to decline to 180k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, dropped from 1.475M to 1.417M in the week ending April 9, the lowest since 1969.
• (Apr 28) – Initial jobless claims fell 5k from 185k, revised up from 184k, to 180k in the week ending April 23, as expected, according to Bloomberg and a three-week low. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, remained steady at 1.408M in the week ending April 16, the lowest since 1969.
• Nonfarm Payrolls (Apr 1) – Nonfarm payrolls rose by 431k in March, less than the 490k gain expected, according to Bloomberg and the weakest pace of job creation in six months. February payrolls, however, were revised up from a 678k rise to a 750k increase, and January payrolls were revised higher from a 481k gain to a 504k rise. Thus, the overall change in nonfarm payrolls (March data + net revisions) was 526k. In the details of the report, private payrolls rose by 426k in March, following a 739k gain in February. Goods producing payrolls, meanwhile, rose 60k thanks to a 38k gain in manufacturing payrolls and a 19k rise in construction payrolls. Service producing payrolls rose by 366k in March, following a 637k gain in February. Leisure and hospitality payrolls led the gain in service payrolls with payrolls rising 112k. Business services payrolls rose 102k with a 5k rise in temporary help payrolls, and trade and transport payrolls increased 54k, thanks to a 49k gain in retail trade payrolls. Also, education and health payrolls increased 53k, information payrolls rose 16k, and financial payrolls also rose by 16k at the end of the first quarter. Additionally, government payrolls increased 5k in March, following an 11k gain in February.
• Participation Rate (Apr 1) – The civilian labor force rose by 418k following a 304k gain in February. As a result, the participation rate ticked up from 62.3% to 62.4% in March, as expected and the highest since March 2020.
• Unemployment Rate (Apr 1) – Household employment rose by 736k in March following a 548k rise the month prior. With a 418k rise in the labor force, the unemployment rate fell from 3.8% to 3.6% in March, more than the expected decline to 3.7% according to Bloomberg, and the lowest since February 2020.
• Average Hourly Earnings (Apr 1) – Average hourly earnings rose 0.4% in March, as expected and following a 0.1% gain in February. Year-over-year, wages rose 5.6% in March, the largest increase since May 2020.
• Average Weekly Hours (Apr 1) – The average workweek fell from 34.7 hours to 34.6 hours in March, a two-month low.

Consumer Activity and Confidence

• Vehicle Sales (Apr 1) – Total vehicle sales dropped from 14.07M to 13.33 in March, more than the expected decline to 13.40M, according to Bloomberg, and a three-month low. Year-over-year, vehicle sales fell 24.4% in March, the ninth consecutive month of an annual decline.
• Consumer Credit (Apr 8) – Consumer credit surged by a record $41.8b in February following an $8.9b rise in January. According to Bloomberg, consumer credit was expected to rise by $18.1b in February.
• University of Michigan Consumer Sentiment
• (Apr 14) – The University of Michigan Consumer Sentiment Index unexpectedly rose from 59.4 to a reading of 65.7 in the preliminary April print, a three-month high. According to Bloomberg, the index was expected to decline to a reading of 59.0 at the start of Q2. In the details, a gauge of current conditions ticked up from 67.2 to 68.1, and the survey’s measure of future expectations jumped from 54.3 to 64.1 in April, a three-month high.
• (Apr 29) – The University of Michigan Consumer Sentiment Index was revised down from 65.7 to a reading of 65.2 in the final April print, albeit still a three-month high. According to Bloomberg, the index was expected to remain at a reading of 65.7 in the final report. In the details, a gauge of current conditions was revised up from 68.1 to 69.4, while the survey’s measure of future expectations was revised down from 64.1 to 62.5 in April, a three-month high.
• Retail Sales (Apr 14) – Retail sales rose 0.5% in March, slightly less than the 0.6% increase expected, and the weakest pace in three months. February sales, however, were revised up from a 0.3% rise to a 0.8% increase. Year-over-year, retail sales rose 6.9% in March, the weakest pace since February 2021. Car sales dropped 1.9% in March following a 1.5% gain the month prior, while gasoline stations sales jumped 8.9% following a 6.7% increase the month prior. Excluding autos, retail sales rose 1.1% in March and climbed 9.1% over the past 12 months. Excluding autos and gasoline, retail sales rose 0.2% and increased 6.2% year-over-year. In the details, sporting goods sales rose 3.3%, clothing sales climbed 2.6%, and eating and drinking sales rose 1.0% in March, following a 3.0% increase in February. Also, building materials sales increased 0.5%, and miscellaneous sales climbed 0.8%. Additionally, food and beverage sales rose 1.0%, furniture sales gained 0.7%, and general merchandise sales increased 5.4%, despite a 0.3% decline in department store sales. On the weaker side, non-store retailer sales slumped 6.4%, the second consecutive month of decline, and health and personal care sales slid 0.3% in March, also the second consecutive month of a negative print.
• Consumer Confidence (Apr 26) – Consumer confidence, according to the Conference Board, declined from 107.6 to a reading of 107.3 in April, a two-month low. According to Bloomberg, confidence was expected to rise to 108.2 at the start of the second quarter. In the details of the report, a gauge of current conditions declined from 153.8 to 152.6, while expectations rose from 76.7 to 77.2 in April, a two-month high.
• Consumer Spending & Income (Apr 29) – Consumer spending rose 1.1% in March, surpassing the 0.6% gain expected, according to Bloomberg, and up from the 0.6% increase in February. Personal income, meanwhile, rose 0.5% in March, a tenth of a percentage point more than expected according to Bloomberg, albeit down from the 0.7% increase reported last month. Year-over-year, consumer spending increased 9.1%, while personal income dropped 11.6%. Adjusting for inflation, real consumer spending rose just 0.2%, while real income fell 0.4% in March, following a 0.1% increase in February. Over the past 12 months, real spending rose 2.3%, while real income plunged 17.1%.

Inflation

• CPI (Apr 12) – The CPI rose 1.2% in March, as expected according to Bloomberg and the sharpest monthly increase since September 2005. Year-over-year, consumer prices jumped 8.5%, up from the 7.9% pace reported the month prior and the fastest rate since December 1981. Food prices rose 1.0% and energy prices surged 11.0% in March, up from a 3.5% gain in February. Excluding food and energy costs, the core CPI rose 0.3%, less than the 0.5% gain expected according to Bloomberg, and following a 0.5% increase in February. Year-over-year, the core CPI increased 6.5%, the largest annual increase since August 1982. In the details, commodities prices jumped 2.1%, medical care prices increased 0.5%, and apparel prices climbed 0.6% in March. Also, housing prices increased 0.7%, thanks to a 0.4% rise in the OER, other goods and services costs rose 0.5%, and recreation prices gained 0.2% at the end of Q1. Additionally, transportation prices climbed 3.9%, due to a 0.2% gain in new vehicle prices. Used cars and truck prices, however, dropped 3.8% in March, the second consecutive month of decline. Additionally, education and communication prices fell 0.2% in March following no change in February.
• PPI (Apr 13) – The PPI rose 1.4% in March, more than the 1.1% gain expected according to Bloomberg, and the largest monthly increase on records dating back to 2010. Year-over-year, producer prices surged 11.2% in March, also the largest gain on record and following a 10.3% rise in February. Food prices rose 2.4%, and energy prices jumped 5.7% in March. Excluding food and energy costs, the core PPI rose 1.0%, double the 0.5% rise expected, and following a 0.4% gain in February. Year-over-year, the core PPI increased 9.2% in March, up from the 8.7% gain in February, and a record high. Additionally, services costs rose 0.9%, due to a 1.2% gain in trade costs, and a 5.5% increase in transportation and warehousing costs in March.
• PCE (Apr 29) – The PCE rose 0.9% in March, as expected, according to Bloomberg, and up from a 0.5% increase the month prior. Year-over-year, headline inflation increased 6.6%, the most since January 1982. Excluding food and energy, the core PCE rose 0.3% in March, also as expected and following a similar gain in February. Year-over-year, core inflation increased 5.2%, down slightly from the 5.3% annual increase last month.

Manufacturing and Production Activity

• ISM Manufacturing (Apr 1) – The ISM Manufacturing Index unexpectedly fell from 58.6 to 57.1 in March, the lowest reading since September 2020. According to Bloomberg, the index was expected to rise to 59.0. March’s reading of 57.1, however, marked the 22nd consecutive month of a reading above 50, signaling expansion. In the details of the report, prices paid jumped from 75.6 to 87.1, and employment increased from 52.9 to 56.3, a one-year high. On the other hand, new orders declined from 61.7 to 53.8, production fell four points to 54.5, and supplier deliveries declined from 66.1 to 65.4, a two-month low. Additionally, imports fell from 55.4 to 51.8 and exports dropped from 57.1 to 53.2 in March.
• ISM Services (Apr 5) – The ISM Services Index increased from 56.5 to 58.3 in March, slightly less than the rise to 58.5 expected, according to Bloomberg, albeit a two-month high. In the details, business activity rose from 55.1 to 55.5, new orders increased four points to 60.1, and employment climbed to 54.0 in March from 48.5 in February, a three-month high. Also, prices paid rose from 83.1 to 83.8, inventories increased from 50.8 to 51.7, and backlog of orders inched up from 64.2 to 64.5 in March, a four-month high. On the other hand, supplier deliveries fell from 66.2 to 63.4, and inventory sentiment dropped from 55.3 to 40.2 in March, the lowest reading since December.
• Empire Manufacturing (Apr 15) – The Empire Manufacturing Index jumped from -11.8 to +24.6 in April, surpassing the expected rise to +1.0 and a four-month high. In the details of the report, prices paid rose by 12.6 points to 86.4, the highest on records dating back to 2001, while prices received fell seven points to 49.1. New orders rose from -11.2 to +25.1, a one-year high. On the other hand, the number of employees slipped from 14.5 to 7.3, and the six-month business conditions gauge fell from 36.6 to 15.2 at the start of Q2, the lowest reading since April 2020. In other words, the headline rise, while seemingly positive, was primarily driven by rising costs.
• Industrial Production (Apr 15) – Industrial production rose 0.9% in March more than the 0.4% gain expected and following a similar increase in February.
• Capacity Utilization (Apr 15) – Capacity utilization increased from 77.7% to 78.3% in March, the most since January 2019. According to Bloomberg, capacity utilization was expected to rise to 77.8%.
• Philly Fed Business Outlook Survey (Apr 21) – The Philly Fed Index dropped from 27.4 to 17.6 in April, more than the expected decline to 21.7, and a two-month low. In the details of the report, prices paid rose from 81.0 to 84.6, and prices received increased from 54.4 to 55.0 in March, a five-month high. On the other hand, new orders dropped eight points to 17.8, and shipments plunged from 30.2 to 19.1 at the start of the second quarter. Additionally, employment climbed from 38.9 to 41.4, and the average workweek fell from a reading of 21.4 to 20.8 in April, a two-month low.
• Dallas Fed Index (Apr 25) – The Dallas Fed Manufacturing Activity Index dropped from 8.7 to a reading of 1.1 in April, more than the expected decline to a reading of 5.0, according to Bloomberg and the lowest reading since July 2020. In the details of the report, new orders rose from 10.5 to 12.1, a two-month high, and shipments increased from 7.0 to 11.8, also a two-month high. On the other hand, production declined from 13.2 to 10.8, employment slipped from 25.5 to 24.6, and capacity utilization decreased from 15.1 to 14.3 in April, a two-month low. Additionally, the six-month outlook plunged from 8.2 to 1.8, the lowest reading since May 2020.
• Richmond Fed Manufacturing (Apr 26) – The Richmond Fed Index unexpectedly rose one point to a reading of 14 in April, a four-month high. According to Bloomberg, the index was expected to decline to a reading of 9 at the start of the second quarter. In the details of the report, the new orders index fell from 10 to 6, and the number of employees declined one point to a reading of 22. On the other hand, the shipments index rose from 9 to 17, and wages jumped from 37 to 41 in April, a seven-month high.
• Durable Goods (Apr 26) – Durable goods orders rose 0.8% in March, less than the 1.0% rise expected, according to Bloomberg, albeit the strongest gain in two months. Year-over-year, headline orders rose 9.9% in March, the weakest annual increase since February 2021. Transportation orders rose 0.2%, following a 4.4% decline the month prior, due to a 5.0% gain in vehicles and parts orders. Civilian aircraft orders, however, fell 9.9%, the second consecutive month of decline. Excluding transportation, durable goods orders rose 1.1% in March and increased 9.1% over the past 12 months. In other details, electrical equipment orders rose 3.9%, following a 1.2% increase the month prior, primary metals orders gained 1.5%, fabricated metals orders increased 0.8%, and machinery orders rose 0.7% in March. Additionally, computers and electronics orders jumped 2.6% in March, the strongest monthly gain in four months.
• Capital Goods (Apr 26) – Capital goods orders dropped 1.1% in March. Nondefense capital goods orders, meanwhile, decreased 0.5%, following a 6.1% drop in February. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 1.0% in March, double the rise expected and the largest monthly gain in two months. Year-over-year, business investment increased 9.7%, down from the 11.0% gain reported last month and the weakest annual pace since February 2021.
• Kansas City Fed Manufacturing (Apr 28) – The Kansas City Fed Index dropped from 37 to a reading of 25 in April, more than the expected decline to 35 and a three-month low. In the details of the report, production dropped from 46 to 28, and the volume of new orders slumped from 33 to 10 in April. Additionally, shipments fell from 46, to 27, and the six-month outlook declined from 41 to 34 in April, a four-month low. On the other hand, prices paid rose two points to 83, and the number of employees ticked up from 18 to 19 in April, a two-month high.
• Chicago PMI (Apr 29) – The Chicago PMI dropped from 62.9 to 56.4 in April, more than the expected decline to 62.0, according to Bloomberg and a two-month low. In the details, prices paid rose at a faster pace, signaling expansion, while employment fell at a faster pace, signaling contraction.

Housing Market Activity

• Construction Spending (Apr 1) – Construction spending rose 0.5% in February, less than the 1.0% rise expected and following an upwardly revised 3.0% increase in January. Year-over-year, construction spending rose 11.2% in the second month of the year.
• NAHB Housing Market Index (Apr 18) – The NAHB Housing Market Index declined two points to a reading of 77 in April, as expected according to Bloomberg and a seven-month low.
• Building Permits (Apr 19) – Building permits rose 0.4% in March, pulling the annual pace up from 1.865M to 1.873M, a two-month high. According to Bloomberg, building permits were expected to decline 2.4%. Single family permits fell 4.8%, while multi-family permits rose 10.0% in March. Year-over-year, building permits climbed 6.7% in March, down, however, from the 8.1% annual increase in February.
• Housing Starts (Apr 19) – Housing starts rose 0.3% in March, pulling the annual pace up from 1.788M to 1.793M, the highest level since June 2006. According to Bloomberg, starts were expected to fall 1.6% at the end of Q1. Single family starts fell 1.7%, while multi-family starts increased 4.6%. Year-over-year, housing starts rose 3.9% in March following a 23.6% annual jump in February. On a regional basis, starts rose in two of the four regions of the country in March: starts surged 110.8% in the Northeast and rose 7.7% in the West. On the other hand, starts fell 2.9% in the Midwest and dropped 17.2% in the South.
• Existing Home Sales (Apr 20) – Existing home sales dropped 2.7% from 5.93m to 5.77m in March, the lowest level since June 2020. According to Bloomberg, home sales were expected to fall 4.1% at the end of the first quarter. In the details, single family sales fell 2.7% and multi-family sales decreased 3.0%. Year-over-year, existing home sales dropped 4.5% in March, the eighth consecutive month of decline. As a result of a decline in sales, the months’ supply of existing homes rose from 1.7 to 2.0 months, averaging 1.8 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 15.0% in March from a year earlier to $375k, a record high.
• New Home Sales (Apr 26) – New home sales dropped 8.6% from 835k to 763k in March, a four-month low. According to Bloomberg, new home sales were expected to decline 0.6% at the end of the first quarter. Year-over-year, sales dropped 12.6%, following a 1.5% annual gain in February. Due to a fall in sales, the months’ supply of new homes rose from 5.6 to 6.4 months, a five-month high. From a price standpoint, the median cost of a newly constructed home rose 3.6% from the month prior to $437k. Year-over-year, new home prices increased 21.4%.
• S&P/CS 20 City Index (Apr 26) – The S&P Case-Shiller 20 City Home Price Index jumped 2.39% in February, surpassing the 1.50% gain expected and the largest monthly increase on record. Year-over-year, the 20-city index rose 20.2%, also a new record high. On a national basis, home prices rose 19.8%, the most in six months and the third biggest increase in the data going back 35 years.
• Pending Home Sales (Apr 27) – Pending home sales declined 1.2% in March, slightly more than the 1.0% decline expected and following a 4.0% drop in February. Year-over-year, pending home sales fell 8.9%, the fourth consecutive month of decline.

Trade and Currency

• U.S. Dollar
• (Apr 8) – Some analysts reported that sanctions could pose a threat to the dominance of the U.S. dollar, and argued that “weaponizing the greenback” could undermine the currency’s dominance in the global market. China, for example, is already buying Russian energy in yuan, and India is looking into a rupee-ruble trade arrangement.?Of course, concerns surrounding the stability of the U.S. dollar as the global currency are nothing new; the end of dollar dominance had been predicted many times before and the U.S. dollar remained in its position. Keep in mind, the sanctions imposed by Washington have been in coordination with other key currencies that would potentially act as an alternative such as the pound, euro or yen. The yuan is an option, but most countries remain hesitant to diversify reserves into a country’s currency that faces significant geopolitical risks. And finally, the U.S. market is still the largest, most liquid market in the world backed by free markets, and a strong financial sector. The dollar rose 4.5% since the start of the year to 99.944.
• (Apr 29) – The dollar was under pressure following the release of the PCE, off 0.4%. More broadly, however, the greenback still rose 8% since the start of the year to 103.218.
• Trade (Apr 5) – The U.S. trade deficit was little changed at $89.2b in February, following a record in January. According to Bloomberg, the deficit was expected to narrow to $88.5b in the second month of the year. In the details, the value of imports rose 1.3% to a record $317.8 billion, and exports climbed 1.8% to $228.6 billion in February.?
• Import & Export Prices (Apr 14) – Import prices rose 2.6% in March, more than the 2.3% gain expected and higher than the 1.6% increase in February. Year-over-year, import prices climbed 12.5%, the most since September 2011. Export prices, meanwhile, rose 4.5% in March and increased 18.8% over the past 12 months, the largest annual gain on record.

Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast
• (Apr 29) – Following an unexpected 1.4% decline U.S. activity in the first quarter of the year, the Atlanta Fed's GDPNow’s second quarter initial forecast is 1.9%.
• Fed Speak/News
• (Apr 6) – According to Fed Governor Lael Brainard, a "rapid" reduction in the Fed’s balance sheet could begin as soon as May. Speaking at a Minneapolis Fed conference, Brainard said balance sheet reduction is “of paramount importance" to bring down inflationary forces, while the Fed is "prepared to take stronger action if indicators show such action is warranted."
• (Apr 18) – Speaking virtually at an event hosted by the Council on Foreign Relations, St. Louis Fed President James Bullard suggested a more sizable increase in rates may be appropriate at the May 4 FOMC meeting. I wouldn’t “rule out” a 75 basis-point increase, he said, “but it isn't my base case.” Bullard went on to emphasize that the fed funds rate should be lifted to 3.5% at a minimum by the end of this year, 160bps above the consensus forecast according to the Committee’s March dot plot.
• (Apr 19) – Speaking to the Economic Club of New York, Evans suggested that the fed funds rate is likely to go above neutral, which officials estimate is around 2.4%. "Probably we are going beyond neutral – I mean, that's my expectation," Evans said.
• (Apr 19) – Speaking at a town hall event on pandemic economics hosted by the University of Minnesota, Kashkari said supply chain disruptions and recent lockdowns in China due to Covid could complicate the Fed’s outlook. He said that what the Fed does will in part be “determined by some of these other factors.”
• March 15-16 FOMC Meeting Minutes (Apr 6)
• The March FOMC meeting minutes had two clear takeaways: officials appear 1) poised to hike rates 50bps in May, and 2) initiate a sizable drawdown of the balance sheet. According to the March FOMC meeting minutes, many officials would have preferred a larger half-point rate increase as opposed to the smaller 25bp increase announced instead. Given the near-term uncertainty “associated with Russia and Ukraine,” however, the Committee acquiesced for a smaller quarter-point increase, rather than a larger, more startling move. Recall, St. Louis Fed President James Bullard was the only formal dissent in March in favor of a larger increase, although the minutes suggest many other officials were in his camp and will likely remain there. “Many participants noted that one or more half-percentage-point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remain elevated or intensified,” the minutes said. According to the minutes, Committee members also expressed growing angst amid “too high” inflation, concerns which have only been exacerbated by the recent events overseas as international conflict between Russia and Ukraine continues. In fact, “inflation” was used 83 times throughout the minutes. Such growing concerns coupled with a further realized increase in prices all but solidifies a larger, more aggressive move in May. Aside from a presumed May rate hike, the meeting minutes also indicated officials’ expectations for a more rapid and aggressive drawdown in asset holdings relative to the previous cycle in 2014. According to the details, the majority of Fed officials support runoff caps of $95 billion a month divided between $35 billion for MBS and $60 billion for Treasuries, phased in over “three months, or slightly longer if conditions warrant.” Roughly $1 trillion a year.

·??????Beige Book?(Apr 20)

o??According to the Fed’s latest Beige Book, U.S. economic activity expanded at a "moderate" rate since mid-February amid strong inflationary pressures. In the details, the report described “strong” demand but limited supply. Manufacturing activity was solid for most Fed districts, though supply chain disruptions, a tight labor market and higher input costs continue to put pressure on firms' abilities to meet demand. The report indicated that consumer spending accelerated among retail and non-financial firms, as businesses passed along higher input costs. Price pressures, meanwhile, remained strong since the last report, “with firms continuing to pass swiftly rising input costs through to customers." Going forward, however, with real disposable income growth contracting to record lows, some Fed contacts noted "early signs that the strong pace of wage growth had begun to slow.” Furthermore, the report noted that the economic outlook is "clouded by the uncertainty created by recent geopolitical developments and rising prices.”

Domestic News and Activity?

• Politics and the Biden Administration
• (Apr 5) – Keeping the “pressure” on Russia, the U.S. Treasury halted dollar debt payments from Russian government accounts at U.S. banks. According to officials, the move will force Russia to choose between draining the country’s dollar reserves, spending new revenue it collects, or going into default.
• (Apr 20) – The International Monetary Fund (IMF) warned another round of lockdowns overseas and lingering supply chain bottlenecks could hit the global economy. As a result, the IMF reduced its 2022 growth forecasts for the U.S., the EU, China and Russia, noting, "Just as a durable recovery from the pandemic-induced global economic collapse appeared in sight, the [Russia-Ukraine] war has created the very real prospect that a large part of the recent gains will be erased." The IMF’s forecast for U.S. growth was reduced from 4.0% to 3.7%, Euro Area growth was revised down from 3.9% to 2.8%, and expectations for China’s GDP was reduced from 4.8% to 4.4%. Additionally, Russia’s growth rate was reduced from +2.8% to -8.5%.
• (Apr 25) – According to a survey by the National Association for Business Economics, 70% of U.S. firms boosted wages in the first quarter. Additionally, the survey indicated the net share of those seeing increased materials costs rose to the highest level since the question was first asked in 1984. The report also indicated 45% of firms reported passing on “some” cost increases to consumers and about 71% anticipate they'll keep climbing.
• (Apr 25) – According to the CDC, daily Covid caseloads rose 51% from two weeks ago to 46,925. While still minimal relative to earlier spikes, the increase prompted at some cities including New York City and Portland to continue to require masks on public transportation.

International News and Activity?

• European Union
• (Apr 1) – Eurozone inflation jumped to a record high of 7.5% in March, well surpassing expectations for a 6.7% increase. Meanwhile, the region’s PMI showed ongoing weakness in production as supply shortages and rising costs led to a reduced level of output. The Eurozone PMI dropped from 58.2 to 56.5 in March, marking a 14-month low.
• (Apr 14) – The European Central Bank (ECB) confirmed plans for a speedier end to its bond-buying program. According to the April 14 statement, the ECB plans to end its asset-purchasing program in the third quarter. While the ECB will continue to reinvest maturing bonds at least through the end of 2024, European officials will slow purchases from the current pace of 40 billion euros to 30 billion euros in May and to just 20 billion euros in June. Along with a sizable drawdown of purchases, the ECB will maintain current rates with the main refinancing rate at zero and the deposit rate at -0.5%.
• (Apr 25) – France's Emmanuel Macron defeated candidate Marine Le Pen in the second round of a runoff vote. According to reports, this was the first time France has re-elected a president in two decades and the second time Macron has overcome Le Pen as a challenger to his post. Although, this time around the margin of victory was significantly reduced. Official results showed Macron with 58.5% of the ballot compared to Le Pen with 41.5%. Five years ago, while the end result was the same, Macron took 66.1% of the votes and Le Pen took home 33.9%.
• (Apr 29) – Eurozone inflation remained at an all-time high in the latest April report, strengthening the argument for a rise in rates. EU inflation rose 7.5% in April, the sixth consecutive month of record high prices. The core, meanwhile, accelerated from 2.9% to 3.5%, a larger than expected gain. GDP in the region rose just 0.2% in the first quarter from 0.3% at the end of last year, reflecting an ongoing impact of the war in Ukraine.
• China
• (Apr 1) – China will give U.S. regulators full access to auditing reports in order to avoid delisting in U.S. exchanges. The would allow the majority of the 200-plus companies to remain listed in New York, although a final deal had not yet been reached. Either way, as Bloomberg News pointed out, the consideration of such marked a rare concession by Chinese officials.
• (Apr 11) – The Covid outbreak in Shanghai intensified with daily caseloads pushing above 26,000. As infection rates increased, Guangzhou, a trading hub, imposed more restrictions, increasing concerns of further supply chain issues.
• (Apr 15) – The People’s Bank of China (PBOC) lowered the reserve ratio for most banks by 25bps. While smaller than the 50bps expected, Chinese officials hoped additional policy stimulus would help to offset the negative economic impact resulting from stringent measures aimed to contain the Covid outbreak. Chinese growth forecasts were downgraded below the government’s target of 5.5%.
• (Apr 18) – Chinese growth accelerated from 4.0% to 4.8% in Q1, surpassing expectations for a 4.4% rise. In the details of the latest report on Chinese activity, fixed investment slowed from 12.2% in the first two months of the year to 9.3% in Q1, industrial production fell from 7.5% in the January-February period to 5% and retail sales were weaker, declining 3.5% from a previous report of +1.7%.
• (Apr 25) – Officials locked down part of Beijing’s eastern district of Chaoyang, though supermarkets remained open. Restrictions, however, were set to ease after residents complete a testing regimen on April 27. The city reported 29 new Covid infections, bringing the total caseload to 70. In response, the People’s Bank of China (PBOC) has taken numerous steps to amplify its easy money policy. The PBOC encouraged banks to lend to businesses in Covid lockdown areas and placed a moratorium on mortgage payments by homeowners in affected areas. Additionally, effective May 15, the PBOC reduced banks' forex reserve ratio 100bps to 8%.
• (Apr 26) – The line of cargo carriers jumped significantly after Shanghai, home to the world’s largest container port, initiated a city-wide lockdown in March to combat Covid-19 cases. As a result, wait times remained double pre-pandemic levels. According to San Francisco-based Flexport Inc., it takes an average of 111 days for goods to reach a warehouse in the U.S. from the moment they’re ready to leave an Asian factory. That’s close to the 113-day record set in January and more than double the trip time in 2019.
• Russia
• (Apr 26) – According to Russian Foreign Minister Sergei Lavrov, while Moscow is willing to talk to the U.S. to try to resolve the conflict in Ukraine, nuclear war is a “serious” risk. “Everyone is reciting incantations that in no case can we allow World War III," Lavrov declared in a TV interview. However, by providing weapons, NATO forces are "pouring oil on the fire," he added. "I would not want to see these risks artificially inflated now, when the risks [of nuclear war] are rather significant. The danger is serious. It is real. It should not be underestimated." The comments came as the U.S. weighed further assistance to Ukraine. Since the start of the war, the U.S. has deployed more than 100,000 U.S. troops to NATO-member countries and has spent $3.4B in security assistance, including an additional $1.3B in aid authorized on April 21. The recent package includes $800M in military aid including howitzer artillery systems, 144,000 rounds of ammunition, and tactical drones, and an additional $500M in direct economic aid to the Ukrainian government to support government operations.

-Lindsey Piegza, Ph.D., Chief Economist