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As Follows

This could cause a significant impact to mortgages – focus on BOLD section below. Increasing the supply and removing the largest buyer simultaneously is like doubling down on upward pressure on rates. Stay tuned. 

For borrowers, lock.

For Secondary…..reduce hedges?

Key Points in BOLD:

  • Federal Reserve Board member Lael Brainard called for a rapid shrinking of the balance sheet.
  • Federal Reserve Bank of Kansas City President Esther George endorsed a similar policy.
  • Rising rates and a dwindling balance sheet are likely to weigh on the near-term growth outlook.

The Federal Reserve’s balance sheet may shrink faster than Wall Street is anticipating…

Since late last year, several central-bank policymakers have been calling for higher interest rates. Federal Reserve Bank of St. Louis President James Bullard has been the most outspoken. At the start of 2022, he said interest rates need to go to 2% by year’s end. But as of last month, he changed his expectation to 3%.

That’s a long way from the current federal-funds target range of 0.25% to 0.5%. And Bullard’s guidance is above the Federal Open Market Committee’s projection of 1.9%. But based on the consensus expectation, we know interest rates are headed much higher.

But the still-unanswered question is how quickly the balance sheet will shrink. It grew from $4 trillion before the coronavirus pandemic to around $9 trillion currently. And as the central bank bought up all those bonds, it kept interest rates ultra-low.

But now, some policymakers are starting to call for a “rapid” shrinking of the amount of assets the Fed holds, beginning in May. Wall Street is anticipating a pace of around $35 billion per month when the process starts, reaching $100 billion by the end of the year. That equates to around $475 billion.

Uncertainty about a more aggressive Fed policy path could push interest rates even higher, increasing near-term volatility for the S&P 500 Index…

Yesterday, Fed Board member Lael Brainard said inflation is growing too quickly and the central bank needs to act more boldly

Here is the full Splash

Market Commentary:

  • The Fed’s balance sheet may shrink faster than Wall Street is anticipating

Market Headlines:

  • Retail gloom builds on weaker consumer demand, inflation worries.
  • JetBlue offers to buy Spirit in all-cash deal.

Morning Market Daily

S&P futures are lower, down 36 to 37 points, as…

  • The U.S. and its European allies are expected to announce a new round of Russian sanctions today that will include a ban on investing and coal imports.
  • Federal Reserve Board member Lael Brainard said the central bank will raise interest rates ‘methodically’ and should consider rapidly shrinking the balance sheet as soon as May.
  • Federal Reserve Bank of Kansas City President Esther George said interest rates need to rise more rapidly to bring inflation under control.
  • Investors await minutes from the Federal Reserve’s most recent policy meeting later this afternoon for more clues on the path of central bank policy.

European markets declined as…

  • German factory order data for February contracted more than anticipated as metal-production demand fell.
  • Eurozone producer price index (“PPI”) figures for February were in line with expectations as rising energy costs continue to push year-over-gains higher.
  • Germany’s Economic Minister Robert Habeck signaled a willingness from Berlin to speed up the timeline for independence from Russian energy supplies.
  • European Central Bank Chief Economist Philip Lane said he expects energy prices to peak by the middle of this year and inflation to ease thereafter.

Asian markets fell as…

  • Caixin China’s composite purchasing managers’ index (“PMI”) data for March fell back into contraction territory, hitting the lowest level since February 2020.
  • China’s National Health Commission said it would extend COVID-19 lockdowns in the city of Shanghai until it can analyze mandatory test results and better evaluate the situation.
  • The Bank of Korea warned inflation could stay near 4% for the foreseeable future due to rising energy and food costs related to the conflict in Ukraine.
  • Japanese-voter polls showed individuals are increasingly worried about the threat posed by Russia and China, wanting Tokyo to spend more on military defenses.

Pre-Market Levels:

S&P -0.81%

Asia – Japan’s Nikkei -1.58%, Japan’s TOPIX -1.34%, China’s Shanghai Composite +0.02%, Hong Kong Hang Seng Index -1.87%, South Korea’s KOSPI -0.88%, Taiwan’s TSE -0.58%

Europe – EuroStoxx 50 -0.83%, UK FTSE -0.30%, German DAX -1.38%, French CAC -1.30%, Italian MIB -1.49%, Spanish IBEX -0.97%

VIX +22.62%

Currencies – Dollar +0.05%, Japanese Yen -0.35%, Euro +0.06%, British Pound +0.02%, Swiss Franc -0.42%, Chinese Yuan +0.02%

Bitcoin -2.04%

Ethereum -2.64%

WTI Crude +1.38%

Brent Crude +1.06%

Nat Gas +1.71%

Gold +0.08%

Copper -0.74%

Silver -0.59%

US Treasury 10-yr yield +8.1 bps at 2.628%

US Treasury 2-yr yield +4.1 bps at 2.555%

German 10-yr yield +4.7 bps at 0.656%

French 10-yr yield +4.6 bps at 1.194%

Italian 10-yr yield +7.0 bps at 2.328 %

Japanese 10-yr yield +2.2 bps at 0.233%

Both voting members of the policy-setting Federal Open Market Committee feel easy-money policies have stayed in place for too long…

The effect became inflated demand for all types of goods because of too much liquidity in the financial system. In addition, a flood of dollars deteriorated its value. The supply-chain problems and war in Ukraine were unforeseen events that compounded the situation.

Longer term, this is the appropriate path for interest rates. Avoiding a problem doesn’t make it go away. The central bank must be more aggressive now to spare itself down the road. But taking bolder steps upfront means it can always back off at a later date.

And by taking the pain in the short term, the central bank can work toward another long cycle of steady economic growth and restock its arsenal for the next crisis.


Market Headlines:

China’s services sector activity squeezed by Omicron surge – Reuters. Activity in China’s services sector contracted at the steepest pace in two years in March as the local surge in coronavirus cases restricted mobility and weighed on client demand, a private sector survey showed on Wednesday.

NATO seeks Asia-Pacific support to thwart Russia-China alliance Nikkei Asia . NATO foreign ministers will meet with their counterparts from the Asia-Pacific this week, seeking to gain their cooperation in deepening the economic and diplomatic isolation of Russia over its invasion of Ukraine.

Brainard says Fed to shrink balance sheet rapidly as soon as May – Bloomberg. Federal Reserve Governor Lael Brainard called the task of reducing inflation pressures “paramount” and said the central bank will raise interest rates steadily while starting balance sheet reduction as soon as next month.

COVID cases in China hit record, as Shanghai extends lockdown – WSJ. China reported a record number of local COVID-19 cases on Monday, as authorities extended a sweeping lockdown in Shanghai to curb the country’s worst outbreak in more than two years.

Fed’s George says rate-hike debate must include balance sheet – Bloomberg . Federal Reserve Bank of Kansas City President Esther George said raising interest rates by half a percentage point in May will be an option as the central bank confronts the hottest inflation in 40 years, though the size of the increase will need to be weighed alongside plans for shrinking the Fed’s $8.9 trillion balance sheet.

Global Macro:

U.S., EU to hit Russian investments with new round of sanctions – Bloomberg . The U.S., European Union, and Group of Seven are coordinating on a fresh round of sanctions on Russia, including a U.S. ban on investment in the country and an EU ban on coal imports, following the discovery of civilian murders and other atrocities in Ukrainian towns abandoned by retreating Russian forces.

Already stalled in U.S., global minimum tax hits European roadblock – WSJ. A global deal to introduce a minimum tax rate on company profits is stalled in both the U.S. and the European Union after Poland on Tuesday vetoed an EU agreement to implement the measure at the end of 2023.

U.S. pitches ‘defensive’ Indo-Pacific trade rules in Singapore – Nikkei Asia. Rather than rejoining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as many countries in the region have called for, the U.S. is preparing to launch a new Indo-Pacific Economic Framework (IPEF) that promises high labor and environmental standards, open cross-border data flows and secure supply chains.

Ukraine’s Zelensky calls for removing Russia from U.N. security council after alleged war crimes – WSJ. Ukrainian President Volodymyr Zelensky told the U.N. Security Council that Russia should be removed from the council, or it should otherwise be dissolved, after warning that newly uncovered atrocities following the withdrawal of Russian forces near Kyiv could be worse than those in the city of Bucha.

Biden announces U.S., UK, and Australia co-operation on hypersonic weapons – FT . The U.S., UK, and Australia will co-operate on the development of hypersonic weapons, expanding a trilateral security pact designed to help Washington and its allies counter China’s rapid military expansion.

White House is said to pause student loans again, pushing payments to September – NY Times. President Biden will allow millions of federal student loan borrowers to freeze their payments until Aug. 31, according to an administration official briefed on the matter, the latest extension of a pandemic relief measure that began more than two years ago.

Retail gloom builds on weaker consumer demand, inflation worries – Bloomberg. Wall Street is growing increasingly cautious on apparel and footwear companies ahead of their next earnings reports amid rising concerns that consumer demand will flag, and inflation will remain high.

U.S. trade deficit narrowed slightly in February – WSJ . The U.S. trade deficit narrowed slightly in February, shrinking 0.1% for the month but remaining close to a record. Both exports and imports climbed as the impending conflict in Ukraine pushed up commodity prices.

30-year fixed mortgage crosses 5% CNBC. The average rate on the popular 30-year fixed mortgage just crossed 5%, now standing at 5.02%, marking the first time it has crossed that threshold since 2011.

Company Specific:

JetBlue offers to buy Spirit in all-cash deal – WSJ. JetBlue’s offer would top Frontier’s bid, potentially frustrating the ambitions of Frontier Chairman William Franke, who helped transform both Spirit and Frontier into ultra-discounters.

GM and Honda to produce ‘attainable EVs’ in bid to surpass Tesla sales – Reuters . General Motors and Honda Motor said on Tuesday they will develop a series of lower-priced electric vehicles based on a new joint platform, producing potentially millions of cars, starting in 2027, in a bid to beat Tesla in sales.

Lockheed Martin, Raytheon to help Australia build missiles to counter China – WSJ. Australia picked two U.S. defense manufacturers to help build guided weapons in the country and said it would accelerate the deployment of new long-range missiles, the latest moves by the U.S. ally to revamp its military to counter China’s growing assertiveness in the region.

Carnival Corp. reports record week of bookings, shares rise – Reuters. The world’s biggest cruise operator Carnival Corp on Tuesday reported its busiest booking week in history as leisure travel continues to rebound from a long pandemic-led hiatus.

Amazon to spend billions on space launches as SpaceX ramps up satellite-internet service – WSJ . Amazon is stepping up plans for its proposed fleet of internet satellites that would compete with a service operated by Elon Musk’s SpaceX, buying dozens of space launches from three rocket companies.

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