Focus on the FOMC meeting

The Russian-Ukrainian conflict, and the energy crisis it has triggered, set the tone of the market sentiment of global stock markets last week. While most European indices started the week in positive territory, Wall Street ended lower due to a drop in the Nasdaq – but all eyes are now on the Fed’s policy meeting, which starts today.

• CAC 40 = +1.75%
• DAX 40 = +2.21%
• Euro Stoxx 50 = +1.59%
• Dow Jones = stable
• Nasdaq = -2.04%
• S&P 500 = -0.74%

FOMC meeting starts today for 2 days – Rate hike expected

As we explained in our previous market update (Commodity prices are skyrocketing), the recent rise of energy, industrial and agricultural raw materials are impacting the inflation outlook and increasing pressure on central banks to start normalizing their ultra-accommodative monetary policies.

Last Thursday, the European Central Bank (ECB) decided to wind down its stimulus program sooner than planned. The ECB should stop its bond-buying program during the 3rd quarter of 2022, and has planned to lower its monthly net purchases to €40 billion in April, €30 billion in May, and €20 billion in June.

The Fed is also expected to reduce the massive economic help provided during the Covid-19 pandemic crisis. Markets expect the Fed to start with an interest rate hike of a quarter percentage point on Wednesday.

Amid increasing inflation concerns due to the Russia-Ukraine war, traders are now pricing up to 7 rate hikes in 2022!
Market participants will closely monitor the FOMC outlook of growth, inflation, and unemployment for further clues about the amount of tightening that they should expect in 2022.

What should you monitor during this meeting?

• Does the hike seem dovish or hawkish?
• What do the updated Fed “dot plot” projections look like?
• Which kind of uncertainties will the Fed mention? Does it sound like they will be more cautious in tightening their monetary policy?
• Even though this rate hike is already priced in, how will the dollar react to the announcements?
• Will the selloff in bond markets continue? On Monday, the 5-year rate topped 2% for the first time in 3 years, while the 7-year yield topped 16 basis points.
• What has been said about the Fed’s balance sheet reduction?
   

What else to watch out for?

• U.S. crude breaks $100
• Gold continues south below $1,955
• EUR/USD around $1.0950
• GBP/USD at its lowest level in a year percent
• Bank of England meeting on Thursday – market participants are expecting that the central bank will raise interest rates to pre-Covid levels: MPC members should support a quarter-point increase from 0.5 percent to 0.75 percent
• USD/JPY reaching a new five-year high
• Bank of Japan meeting across 17-18 March 2022 – investors will monitor updated views on inflation and growth
• Focus on the spread between U.S. and Japanese 10-year government bond yields
• Bitcoin getting closer to the key $40,000 mark
• New potential rounds of negotiations for a cease-fire in the Ukraine/Russia war