Written Commentary
STOCK INDEX FUTURES
U.S. stock index futures were higher yesterday and also today after futures were under pressure at midweek when the FOMC released the minutes from its March 16 policy meeting. The minutes showed that policy makers had considered raising interest rates and unwinding its balance sheet faster.
The 9:00 central time February wholesale inventories report is expected to show a 1.5% increase.
Futures remain well above major downtrend lines, but countering this are geopolitical tensions and the hawkish Federal Reserve.
CURRENCY FUTURES
The U.S. dollar index advanced to its highest in nearly two years, underpinned by the prospects of a more aggressive pace of Federal Reserve tightening. The index is up almost 1.5% so far this week, which would be its biggest advance in over a month. The latest Federal Reserve minutes showed many participants were prepared to hike rates in 50 basis point increments in the coming months and are ready to reduce the central bank’s massive balance sheet from May. In addition, the greenback is being boosted by safe-haven demand.
The Japanese yen is lower and is closing in on the nearly seven-year low that was made on March 28.
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 December 2018.
Federal Reserve officials, as well as its latest FOMC meeting minutes, sent strong indications about a fast tapering, with members of the board discussing a monthly reduction in assets of $95 billion and hiking interest rates steadily over the coming months.
Federal Reserve Bank of St. Louis President James Bullard yesterday said that the central bank is behind on its mission to tame inflation and will likely have to act fairly forcefully to get price pressures under control.
Currently there is a 78.8% probability of a 50 basis point increase and a 21.2% probability of a 25 basis point hike in the fed funds rate at the May 4 policy meeting.
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.
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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