On the latest edition of Market Week in Review, Associate Director of Client Service Chris Kyle and Investment Strategist Alex Cousley wrapped up the first full week of the new economic quarter. They discussed how FOMC meeting minutes point to more likely Fed rate hikes in coming months, potential 2023 recession risk, how China's COVID policies are slowing their growth, and how the Russian invasion of Ukraine is impacting commodity prices around the globe.
FOMC minutes, Fed hikes and 2023 recession risk
Minutes from the U.S. Federal Reserve's (the Fed's) Federal Open Market Committee (FOMC) were released earlier this week while yields continuing their insatiable rise, heavily effecting bond markets. Kyle noted that this situation isn't specific solely to the U.S., as central bank rates are rising globally while inflation lingers.
Cousley called out two important watchpoints from the FOMC minutes. The first was that many FOMC participants would have preferred a 50-basis-point hike, rather than the 25-basis-point hike that occurred. Cousley noted that "we've heard quite a bit of hawkish commentary coming from many members about this desire to tighten faster." The second watchpoint was more color on what the Fed is planning for balance-sheet reduction. Cousley said, "We're looking at $60 billion in Treasuries and $35 billion for mortgage-backed securities. That's roughly in-line with expectations that it would be twice the pace of what we saw through the last experience of this.” Regarding future Fed rate hikes, Cousley noted." We do think a 50-basis-point hike in May is more likely than not. And there is still the possibility of still another 50 basis points in June. Cousley noted that this policy and its impact on yield curves "does start to raise recession risks." He noted that while we still see a runway of growth for the rest of 2022, "we see recession risk building, particularly in the second half of next year."
A steep drop in China's services sector
In other news, Kyle called out the recent tightening of the zero-COVID policy in China and the impact on growth targets there, with recent numbers showing a steep drop in the country's services sector. The Chinese government softened their lockdown approach temporarily in Shanghai, but, Cousley noted, "it hasn't gone particularly well," raising the likelihood of tight lockdowns extending deep into the year.
On the flip side, Cousley noted that there is still a lot of very positive commentary coming out about Chinese stimulus measures. He said, "We haven't really seen anything of meat yet. And so we're kind of waiting to get a sense of what the government is actually planning to do on that stimulus side. We think they're going to get more stimulus, but is it enough to really get us that 5.5% they had as a [growth] target? We think that's probably unlikely, given what's happening now."
The Russia invasion of Ukraine and the impact on commodity prices
In response to the ongoing Russian invasion of Ukraine, the U.S. and UK have put sanctions on the two biggest Russian banks: Sberbank and Alfa Bank. Cousley noted that there are still carve-outs for energy, which continue to be important for the EU and UK. Cousley also noted that the EU have banned coal imports. "Now, this is a much smaller issue for the EU than gas and even oil," said Cousley, "and so it's a very small magnitude, relative to the potential gas ban, which we think is unlikely. But still, that's going to put quite a bit of pressure on the coal market."
How are these and other sanctions impacting commodity prices? Cousley noted that we're starting to see a bit of stabilization in oil prices, with WTI Crude and Brent Crude hovering around $100 a barrel. "We've talked before about the idea that $135 to $150 is the point at which you start to see real risks to economic growth," said Cousley. "$100 is elevated, but it's kind of manageable for most economies right now." Cousley also noted that food prices and wheat prices, while still elevated, are showing similar patterns of moderately reduced prices. "So that should relieve some stress for some of the emerging market economies," he said.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
The Russell logo is a trademark and service mark of Russell Investments.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.