Powell calms Wall Street
Jerome Powell, the chairman of the US Central Bank, put an end to speculation about the Fed’s rate hike this month during a presentation to the House of Representatives on Wednesday. Given the strong labour market and an inflation rate that is much higher than the desired two percent, and taking into account the uncertainty caused by the Russian invasion of Ukraine, he considers it appropriate to raise the policy rate by a quarter, or 25 basis points.
This is a reassuring message because it implicitly indicates that Powell expects the economic damage to the United States from the war in Ukraine to be limited. In addition, he removes the fear of a possible interest rate increase of 50 basis points, which until recently was still seriously considered. Later this year, he might be willing to step up a gear if inflation does not fall as quickly as expected, but he is not going to let that stop him. Looking at the money market, it is currently pricing in 125–150 basis points of interest rate increases this year, up from 175 basis points until recently. As for the timing and pace of the Fed’s planned balance sheet reduction, which has grown to nearly USD 9 trillion in recent years, no decision has yet been made. Powell did say that this would be done predictably by not reinvesting all the proceeds of the bonds that are released.
For investors, the words mean a little less uncertainty and, on balance, a positive message. Despite the fact that the ten-year interest rate in the United States rebounded from 1.72 percent to 1.87 percent (until recently at 2.05 percent), the equity investors on Wall Street enjoyed themselves. The Dow Jones, S&P 500, and Nasdaq rose by 1.79 percent, 1.86 percent, and 1.62 percent respectively.
The ADP job figures came out higher than expected. In the month of February, 475,000 new jobs were added, compared to an expectation of 400,000. The January figure was even adjusted from a loss of 301,000 jobs to a gain of 509,000 jobs. But such a mishmash of figures gives some food for thought…
The OPEC+ meeting, in which Russia is also represented, was a mere formality that was concluded within ten minutes. As expected, OPEC+ will pump up to 400,000 additional barrels per day, if they manage to do so at all, because a large part of Russia’s exports will be lost. Officially, there are no sanctions in place, but there are fewer and fewer shipping companies, for example, that dare or want to send their tankers to Russia without war insurance to pick up oil. It is estimated that this will reduce Russian oil exports by a quarter, or 2 million barrels a day. They prefer to get the oil from the Middle East or the United States, which also explains part of the sharp rise in the oil price. Oil from Russia is currently trading at a discount of 18 dollars to Brent.
Russian equities as good as written off
Meanwhile, Russian shares have been minimised to penny stocks. The Moscow stock exchange has been closed for days and the London stock exchange, where trading was still possible, has lost more than 90% of its value in the past two weeks. Last night, the two leading index builders MSCI and FTSE Russel announced that they were removing Russian shares from their indices. More are expected to follow. In principle, the financial world has thus written down Russian shares to 0. Many Eastern European funds with large exposure to Russia closed earlier in the week because it was too difficult to make a fair price. Getting out for their investors is therefore no longer an option. It reminds one of the scenes of the consequences of the credit crisis. Risk and return are once again inextricably linked.
