Written Commentary
STOCK INDEX FUTURES
Stock index futures declined yesterday with follow-through today after yesterday Lael Brainard of the Federal Reserve, shocked markets when she not only made the case for accelerated rate hikes but also for a faster balance sheet drawdown. She said curbing inflation is “paramount” and the central bank may start trimming its balance sheet rapidly as soon as in May.
Federal Reserve Bank of Kansas City President Esther George said “I think 50 basis points is going to be an option that we will have to consider, along with other things.”
In addition, there is the reduced optimism surrounding Ukraine and Russia talks.
Mortgage applications in the U.S. declined 6.3% in the week ended April 1, pushing the index to its lowest level since March of 2019, as interest rates continue to increase. This follows a 6.8% slump in the previous period and marks the fourth straight week of declines.
The highlight of the day will likely be the 1:00 central time release of the minutes from the March 16 Federal Open Market Committee meeting. Traders will be looking for clues on the central bank’s rate-hike path.
Futures remain well above downtrend lines, but countering this are geopolitical tensions and the hawkish Federal Reserve.
CURRENCY FUTURES
In the overnight trade the U.S. dollar index advanced to a new two-year high, underpinned by hawkish comments from Federal Reserve officials and flight to quality buying.
Annual producer inflation in the euro area hit a new record high of 31.4% in February of 2022, compared to 30.6% in January but slightly below market expectations of 31.5%.
The yield on the German 10-year Bund bounced back 0.65%, closing in on a nearly four-year high of 0.74% hit on March 29, as traders anticipate an accelerated monetary tightening.
Some analysts believe the risk of recession is currently greater in the euro zone than in the U.S.
The yield on Britain’s 10-year Gilts rose to above 1.7%, and is close to the highest since January 2016.
The Japanese yen is lower.
Interest rate differential expectations remain bearish for the Japanese yen and lower prices are likely.
INTEREST RATE MARKET FUTURES
Futures are lower across the board with the 30-year Treasury bond futures falling to the lowest level since March 2019.
Patrick Harker of the Federal Reserve will speak at 8:30.
Traders are keeping a close watch on the yield curve, which measures the spread between short-term and long-term interest rates and is often seen as an indicator of sentiment about the prospects for economic growth.
The Fed has little choice but to increase the pace of fed funds rate hikes given headline inflation rates are the highest since the 1970s and are predicted to go higher.
Currently there is a 76.6% probability of a 50 basis point increase and a 23.4% probability of a 25 basis point hike in the fed funds rate at the May 4 Federal Open Market Committee meeting.
Lower prices are likely across the board for the interest rate futures market as most major central banks are anticipated to tighten credit policies this year.
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