Market Outlook: Latest FOMC Minutes in Focus

The markets may be affected by a more aggressive tightening policy

Hawkish rhetoric from Fed officials has boosted US bond yields, causing the Dollar Index (DXY) to break above the 99.50 level. At its March meeting, the Federal Reserve raised rates by 25bps despite St. Louis Federal Reserve President James Bullard’s call for a 50bps hike. Hopefully, Wednesday’s Federal Reserve minutes will provide some additional information about how the Fed policymakers view this stage of the normalization process.

For 2022, the FOMC upgraded its inflation forecast to 4.3% from 2.6%, and for 2023, to 2.7% from 2.3%, while downgrading its GDP forecast to 2.8% in 2022 and 2.3% in 2023, regarding the latest FOMC update.

Even with the significant upward adjustment to the inflation forecast, it seems well below the current 6.4% increase in the PCE deflator and appears to be underestimated, given the recent sharp rise in the headline CPI rate, which is expected to break 8% in the coming weeks. As the ISM data increased sharply in March, any discussion regarding this in last month’s meeting is likely to have moved up the priority list considering recent data.

Bond Yields jumped on a more hawkish stance from the Fed

It’s currently considered about an 80% chance the Fed will take the course of a 50 bp hike in May. Another rate hike is expected in June as well, and if that becomes more likely, a repricing of those risks may result in more volatility in the markets.

In response to Fed Governor Lael Brainard’s comment that interest rate rises and rapid runoff of balance sheets would result in more neutral monetary policy later this year, Treasury yields hit multi-year highs, and shares fell.

The yield on benchmark ten-year Treasury notes reached a near three-year high of 2.631% on Wednesday as a bond sell-off followed Fed officials’ hawkish comments.

US two-year yields have risen to their highest level since January 2019, and five-year yields have climbed to their highest level since December 2018.

Concerns over slowdown economic growth

China’s markets also caught the eye after data published on Wednesday indicated that activity in the country’s services sector contracted at the fastest pace in two years in March due to the Coronavirus outbreak, which restricted mobility and hurt demand. On Tuesday, the Chinese authorities extended the COVID-19 quarantine to the entire 26-million-person population of Shanghai despite growing opposition to quarantine rules.

According to data released on Wednesday, German manufacturing also shrank more than expected in February due to lower demand from abroad, supply shortages, soaring energy prices, and uncertainty related to the Ukraine conflict. German factory orders contracted 2.2% in February after January’s 2.3% rise.