US and European futures are trading sharply lower as the Fed’s aggressive monetary policy spooks investors. The Fed made it clear last night in FOMC Minutes that no one should be mistaken about the Fed’s stance about inflation as it is ready to bring inflation lower no matter the cost. The fact that the Fed will begin to reduce its balance sheet by 95 billion dollars per month has sent a clear signal that growth in the US is likely to slow down. This is because if overly dovish monetary policy can push the economy out of a recession boundary, then extremely hawkish policy, like the current one, certainly raises the alarm bells for a possible recession.
The US 10 year Treasury yields have been rising. The Treasury yields have already started to give some warnings to investors that the Fed’s monetary policy may not be sustainable for US economic growth. These warnings signs have made investors more worried because they have to deal with the Fed’s hawkish monetary policy stance, which could be another grave policy mistake. Still, they are also anxious about the ongoing conflict between the US and Russia. The sanctions imposed by the US on Russia have costs, and they will matter like soon.
Geopolitical Tensions and Recession Fear
The epidemic has hit Spain’s economy hardest out of the eurozone’s economies, and Russia’s conflict with Ukraine has threatened the situation to worsen. In Spain, household energy expenses are connected to rising natural gas and electricity wholesale prices. If the battle continues, inflation will likely remain above 9% until August, slowing Spain’s recovery.
We now expect the economy to decline in the second quarter due to the massive strain on household expenditure and the interruption to business. We anticipate that the war in Ukraine will shave 1.8 percentage points off Spain’s GDP by 2022. The government’s efforts to set a price ceiling on gasoline might significantly lessen these dangers.
We envision three possible possibilities for the economy in the future.
De-escalation: With peace talks proceeding, our best-case scenario is that Russia’s conflict with Ukraine ends quickly. Russia and Ukraine are still in a terrible recession, while oil prices may return to $80 per barrel and gas costs may fall. In 2022, Spain’s economy will grow at 5.8%, with inflation averaging 5.8%.
The conflict goes on: This is our baseline scenario. Russia and Ukraine will face a severe recession; crude oil prices will soar to $120 per barrel in 2022, and gas costs will increase to 130 euros per megawatt-hour. This year, growth will be 3.9 per cent, while inflation may remain at 8.2 per cent.
Escalation: The conflict intensifies, ushering in a year of European energy uncertainty. Russia and Ukraine will be even more intense recession, with oil prices will soar to $200 per barrel in the second quarter before falling to $150, possibly in the 4Q. Natural gas will go through the roof and likely to hit 200 euros per megawatt, and Spain will tip into a technical recession while the inflation reading could surge to 10.6%
We kick start the day with the German industrial number, which will hit the tape at 07:00 AM GMT. In January, German industrial production increased by 2.7 per cent, indicating that supply constraints are loosening. Nonetheless, supply restrictions and rising energy costs will hamper the industrial sector’s recovery in the coming months. The Bundesbank has warned of a further decrease in overall growth in the first quarter, partly due to the impact of worker absences caused by a new wave of Covid-19 infections.
Later in the day, we have the US Weekly Unemployment claims data coming out at 13:30 GMT. The forecast is for 201K, while the previous reading was 202K. But the economic event which is likely to move the markets the most is FOMC member James Bullard’s speech, who is slated to speak at 14:00. Remember, he holds immensely hawkish views of the economy. Given that the FOMC minutes already spooked the markets last night, any further hawkish talk by Bullard will make traders more nervous. Investors may want to keep a close on the S&P 500 futures and gold prices as they are likely to be highly volatile on the back of that and other instruments. Generally speaking, Bullard’s speech most influences gold prices and the dollar index as he wants to control inflation at any cost.
Forex: Ruble Is Not “Rubble”
President Joe Biden made a joke about the Russian currency when Russia attacked Ukraine, and the US began its sage of imposing sanctions on Russia. He called the nation’s currency “rubble,” This was when the Russian Ruble was facing a deep decline due to sanctions by the US and its allies. However, as of yesterday, Biden’s joke has turned, as the Russian Ruble has recovered all of its losses against the dollar since the war began with Ukraine.