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Stocks fell on Wednesday following the release of the Fed’s meeting minutes, which suggested that more members of the Central Bank were open to moving aggressively to raise interest rates to fight the fastest pace in roughly forty years. In the bond market, the benchmark 10-year Treasury yield rose to top 2.6%, marking its highest level since May 2019, while the price of oil declined, falling -4.5% to below $100 a barrel.

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Developments on Russia’s war in Ukraine and the Western response remained in focus Wednesday as the U.S., European Union and the Group of Seven (G7) readied another round of sanctions against Russia. The U.S. and allies are expected to add additional penalties to more Russian government officials and family members, and Russian-owned enterprises and financial institutions.

In the US, new hawkish commentary by Fed officials sent stocks sharply lower and the Treasury yields spiking. The Fed’s meeting minutes showed officials want to start reducing their balance sheet by around $95 billion a month, a process known as quantitative tightening (QT). The opposite of quantitative easing, QT is a contractionary policy meant to decrease the amount of liquidity within the economy. 

The minutes said, “Notwithstanding uncertainties associated with geopolitical developments, many central banks continued to signal intentions to move ahead with reducing policy accommodation to address elevated inflation.”

Officials “generally agreed” that $60 billion in Treasuries and $35 billion in mortgage-backed securities (MBS) would be allowed to roll off, phased in over three months and likely starting in May. That total would be about double the rate of the last effort, from 2017-19, and represent part of a historic switch from ultra-accommodative monetary policy of the last two years. 

The minutes said, “In their discussion, all participants agreed that elevated inflation and tight labor market conditions warranted commencement of balance sheet runoff at a coming meeting, with a faster pace of decline in securities holdings than over the 2017–19 period.”

The minutes said, “Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.” 

Speaking of the path forward, the minutes revised expectations for the interest rate sharply higher. The minutes said members now expect “the federal funds rate would increase around 170 basis points through year-end, about 70 basis points more than had been priced in at the time of the January meeting. Similarly, the median projection of the target range for the federal funds rate in the Open Market Desk’s most recent surveys of primary dealers and market participants showed an increase of 150 basis points this year.”

Read the entire meeting minutes here: https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20220316.pdf

In addition to the balance sheet talk, officials also discussed the pace of interest rate hikes ahead, with members leaning toward more aggressive moves. The minutes heavily pointed to a rate hike of 50 basis points (0.50%).  In fact, there was considerable sentiment to go higher in last month’s increase but uncertainty over the war in Ukraine deterred some officials from going with a 50 basis point move in March.

The meeting minutes reaffirmed other, more recent remarks from monetary policymakers. Federal Reserve Governor Lael Brainard said Tuesday that the Federal Open Market Committee (FOMC) was “prepared to take stronger action” should already elevated indicators of inflation rates and expectations warrant such moves.

In addition, San Francisco Fed President Mary Daly told the Financial Times on Tuesday that the case for a 50 basis-point interest rate hike — or a hike double the size of the central bank’s typical per-meeting increase — “has grown.”

With inflation rates in the U.S. still holding at around 40-year highs and forcing the Fed’s hand in aggressively tightening financial conditions, some on Wall Street have downgraded their expectations for U.S. and global growth. Deutsche Bank economists said Tuesday they expected the U.S. to tip into a recession at the end of next year as the Fed rapidly hikes rates to address high prices.

Deutsche Bank economists David Folkerts-Landau and Peter Hooper said, “We now expect the U.S. economy to be in outright recession by late next year, and the [Euro area] in a growth recession in 2024 with unemployment edging up. Our baseline view is that these developments will spill over to damp growth in much of the rest of the world and at the same time help to bring inflation back toward mandated levels, diminishing the risk of greater disruptions further down the road.”

Still, the economists noted their call for a recession next year “is currently way out of consensus” — and indeed, many on Wall Street still see a slowdown, but not necessarily a period of negative growth in the near-term domestically.

Economists at Wells Fargo said in response, “We’re not thinking that the Fed is going to push the economy into recession. I think most are not expecting that. But we are expecting a kind of a slowdown in economic growth from what we had expected previously, but still around average economic growth here in the U.S.”

In other news, Chinese authorities on Tuesday extended a lockdown in Shanghai to cover all 26 million people living in the city, despite growing anger over quarantine rules in the city, where latest results show only 268 symptomatic daily COVID-19 cases. The port of Shanghai is the largest port in the world, such a move is likely to further disrupt already snagged supply chains. 

Highlights

  • JetBlue (JBLU) shares dropped Wednesday morning after the carrier made an offer to purchase Spirit Airlines (SAVE) — less than two months after the budget airline agreed to merge with Frontier Group.
  • U.S. mortgage applications dropped for a fourth consecutive week into the beginning of April, with fast-rising mortgage rates deterring homeowners from refinancing and new buyers from coming into the market. The Mortgage Bankers Associations’ weekly index showed mortgage applications fell 6.3% week-on-week during the period ending April 1. This came following a 6.8% drop during the prior week.
  • Amazon workers on New York’s Staten Island just made history, becoming the first group to vote in favor of unionizing at a U.S. facility. Amazon is famously anti-union.
  •  New York Attorney General Letitia James called on some of the biggest U.S. banks on Wednesday – JPMorgan Chase & Co, Bank of America, US Bancorp, and Wells Fargo & Co – to eliminate all overdraft fees in consumer accounts.
  • Today, at the Team22 user conference, Atlassian announced the launch of Compass, a developer portal designed to enable developers to collaborate on security, compliance and projects in a single location. 
  •  U.S. stock buybacks appear to be hitting new records as companies head into quarterly earnings season, even as some investors worry about the growing threat of inflation, a potential recession and stagnant share prices. New repurchase announcements by U.S. companies reached over $300 billion in the first quarter
  • Major online platforms face a yearly fee up to 0.1% of annual net income to cover the costs of monitoring compliance with new European Union rules requiring them to do more to police their content, an EU document shows.

““Difficulties strengthen the mind, as labor does the body.”  – Seneca