The highlight of the coming week will be Wednesday’s minutes of the Federal Reserve’s March meeting, which will be scrutinized amid widespread expectations for a half percentage point interest rate hike next month. Along with concerns over the economic impact of tighter monetary policy, developments around the war in Ukraine will remain front and centre. While stocks have shrugged off concerns over the outlook for growth, the bond market is flashing warning signs. The European Central Bank will also publish minutes, while the Reserve Bank of Australia is to meet. Meanwhile, oil prices will remain in the spotlight after their steepest weekly decline in two years. Here’s what you need to know to start your week.
Fed Minutes
Wednesday’s minutes of the Fed’s March meeting will give investors an update on how officials view the monetary policy outlook and may also contain more details on plans to shrink the central bank’s $9 trillion balance sheet.
The Fed hiked rates last month by a quarter of a percentage point, the first step in a monetary tightening cycle aimed at curbing inflation, currently at a four-decade high. Since the March meeting several Fed officials, including Chair Jerome Powell, have indicated that they are prepared to hike rates more aggressively to prevent high inflation from becoming entrenched.
Friday’s solid employment report paved the way for a half percentage point rate hike from the Fed at its next meeting on May 4.
Several Fed officials are also due to make appearances during the week, including Fed Governor Lael Brainard, Minneapolis Fed President Neel Kashkari, New York Fed President John Williams and St. Louis Fed President James Bullard.
Bond Market Flashes Red
A closely watched part of the U.S. Treasury yield curve inverted again on Friday after the strong U.S. jobs report solidified expectations for bigger rate hikes by the Fed.
An inversion of the yield curve, when shorter-dated yields rise above longer-dated ones, is a phenomenon that has predicted past recessions.
Stock markets have seemingly shrugged off concerns that tighter monetary policy and uncertainty arising out of the war in Ukraine could tip the economy into recession, but bond investors seem to have taken a more pessimistic view.
However, some analysts think the reliability of yield curve inversions as an indicator of recession has decreased, particularly as the Fed’s massive bond-purchasing programs are keeping long-dated yields suppressed.
Oil Price Volatility
Both Brent and U.S. crude oil ended last week down around 13%, their largest weekly declines in two years after U.S. President Joe Biden announced a release of 1 million barrels per day of oil for six months from May, in what is to be the largest ever release from the U.S. Strategic Petroleum Reserve.
Russia’s invasion of Ukraine has seen oil prices rise around 30% in the first quarter, with soaring energy costs becoming a key driver of inflation expectations.
But energy market analysts appeared sceptical of the plan’s success.
“The knee-jerk selloff from the SPR announcement of the release of 1-million barrels a day from the SPR over the next six months won’t have a lasting impact on oil prices, so if geopolitical risks continue to intensify, the oil will recover most of this week’s losses,” said Ed Moya, an analyst at online trading platform OANDA.
Economic Data
Apart from Wednesday’s Fed minutes, the economic calendar is light for the coming week with the main focus likely to be Tuesday’s ISM services PMI.
Economists are expecting the index to rebound to 58.0 from what was a twelve-month low of 56.5 in March. The effects of the Omicron wave saw the index fall from an all-time high of 69.1 reached in December and concerns over soaring inflation may now limit consumer demand.
The U.S. is also to release factory orders, initial jobless claims, and trade balance.
Central Banks
The ECB is to publish the minutes of its March meeting, with slightly more than a week to go until its upcoming meeting on April 14. The ECB surprised markets last month when it announced that it was speeding up plans to withdraw stimulus measures.
Since then, data showed that Eurozone inflation hit a fresh record high of 7.5% in March, adding to pressure on the ECB to act to curtail inflation even as economic growth is slowing amid the lingering effects of the pandemic and fallout from the war in Ukraine.
Elsewhere, the Reserve Bank of Australia is expected to keep its rate on hold at its latest policy-setting meeting on Tuesday.
The Bank of Canada is to publish its business outlook survey on Monday and an upbeat reading could cement expectations for a half percentage point rate hike at its next meeting on April 13.
