US

Soaring inflation was already a dominant theme for markets coming into 2022. The sanctions imposed on Russia in response to its invasion of Ukraine have only exacerbated its expected rise, and pushed its expected peak further out.

The much-anticipated March FOMC meeting is finally upon us, and given there was no meeting in February investors will be very glad of this window into the Fed’s thinking, particularly given the ongoing and far-reaching economic ramifications of Russia’s invasion of Ukraine.

We think a base case that central banks will follow a more measured monetary policy path than markets are currently pricing in is reasonable given the current backdrop.

Escalating geopolitical tensions have contributed to a volatile past week for investors, but uncertainty regarding central bank action continues to dominate the bond markets, with one investment bank now predicting nine straight hikes from the Fed beginning at its March meeting.  

Yield curve shape and yield curve change are often good predictors of the state of the economy and its outlook.

As 2021 wore on we became increasingly concerned that the disconnect between asset prices, economic fundamentals and monetary policy was becoming more acute.

Powell’s hard line may have surprised investors, particularly in light of recent market volatility and increasing geopolitical risk in Eastern Europe, but the Fed’s fear of prolonged higher inflation looks to be trumping those concerns.

It has been a very interesting start to the year in the rates sector of the market.

As we enter the third year of the pandemic, most market participants are asking themselves (once again) if this will be the year when supply chain issues finally abate.

Given the swiftness of the Fed’s pivot we think risks are tilted towards the central bank doing more and not less. We wouldn’t even rule out a 50bp rate hike at some point.

Jerome Powell’s recent testimony to the Senate Banking Committee, in which he said the Fed would discuss a faster taper of its asset purchases at December’s FOMC meeting, has led to intense speculation that we could see a move this week.

The labour market in the US shows little sign of weakening, despite the huge number of jobs already created this year.