Jerome Powell wants to see US interest rates rise faster. Yesterday, during a speech entitled “Restoring Price Stability”, Powell told the National Association for Business Economics that there could be a 50 basis point hike in May, and in subsequent sessions, if the Federal Reserve (Fed) officials conclude that it is more appropriate to move faster.
And it will likely be more appropriate for the Fed to act more quickly, as inflation is sure to continue to climb to new multi-decade highs given that the latest numbers don’t even factor in soaring oil prices and war-induced raw materials, and the Covid-led restriction measures that add further strain to the global supply chain crisis.
Powell is now playing with an open hand, as he isn’t necessarily rocking the boat with surprise hawkish moves that would tempt investors to write off their assets faster than necessary. And a panicked market is not the ideal environment to raise rates.
Activity in fed funds futures suggests that the probability of a 50bbp hike is close to 65%, suggesting there is more to come for Fed hawks.
However, the US 2-year rate could hardly rise any faster, and the spread between the 2 and the 10-year is about to turn negative. A yield curve inversion is interpreted as a sign of an upcoming recession, although UBS warns that a recession started on average 21 months after a yield curve inversion – ranging between 9 and 34 months, and that S&P500 stocks have returned an average of 8% over the 12 months following the reversal of a 2-10 year return.
Market reaction to Powell’s hawkish rhetoric has been contained. New York stocks sold off as a knee-jerk reaction but nearly erased all losses with a late-session rebound as investors believed higher rates would be less toxic to businesses than higher inflation at higher long term. Yet earnings remain vulnerable to macro and geopolitical pressures, and the risk of rapid selloffs remains on the table as uncertainties loom, energy prices continue to rise and boost inflation expectations and hawks from the Fed.
Oil rallies, again
Energy and materials stocks remain ideal for hedging, one of the biggest winners in yesterday’s US session was Marathon oil, which rose 8.5% as US crude gained over 7% and was up another 2.5% to 115bps at the time of writing. . The next natural target for the bulls is at the latest resistance of 130bp, if breached it will reignite speculation of a further advance towards the 150bp mark.
The main drivers of the latest rally are an attack on Saudi installations on Sunday and the EU’s consideration of an embargo on Russian oil. The biggest risk of sanctioning Russian oil is losing Russian gas with it, and Russian gas accounts for about 40% of European gas imports. But as Qatar has agreed to work on supplying Germany with LNG, the idea that the EU could withdraw from Russian oil has become more realistic.
European gas futures fell 8% yesterday as gas supply via Ukraine remains good for now, and US LNG stocks gloat over European efforts to remove whatever comes from Russia. Chesapeake gained more than 3% yesterday, as Antero Resources jumped 3.5%, EQT nearly 5% and Range Resources more than 1%.
At the index level, the FTSE was the lone gainer in Europe yesterday, with energy companies pushing the index higher, with BP and Shell gaining more than 4% each. FTSE futures outperformed their US and European counterparts in the overnight trading session on the back of firmer oil and commodity prices and a cheaper British pound.