U.S. Equity Markets reversed Wednesday’s gains in what turned about to be a savage move lower as the NASDAQ 100 made a new low for the year, ending the day with a loss of 5.06%. This move lower saw the VIX spike over 22%, closing at a price of 31.20. The U.S. Department of Labour reported that another 200,000 people filed Initial Jobless Claims in the week ending April 30. This figure was above the week prior’s upwardly revised figure of 181,000 and Wall Street’s forecast of 180,000. The data came shortly after the U.S. Bureau of Labour Statistics’ Job Openings and Labour Turnover Survey hit a record high. This means individuals are not having trouble finding jobs with better pay, which indicates that many consumers have more money in their bank accounts to spend on goods. As a result, this is sending inflation higher. The Fed is intent on returning monetary policy back to pre-pandemic levels at a minimum. After all, economic activity has rebounded and even surpassed levels achieved in 2019. That means interest rates need to go back to a target range of at least 1.50% to 1.75% while the balance sheet needs to shrink to $4 trillion from the current $9 trillion. Central bank policymakers nationally agree. Chicago Fed President Charles Evans and San Francisco Fed President Mary Daly have called for interest rates to return to neutral (neither hurts nor helps the economy) by December. Policymakers have said getting to that neutral rate of 2.4% should slow inflation’s growth… but they need to get there first. That is where the pain comes in. The implication of achieving neutral by December means rates need to rise by another 1.25% to 1.5% over the next four meetings in June, July, September, and November. You do the math… that’s at least two 0.5% increases and one 0.25%. The FOMC also began shrinking the $9 trillion balance sheet. Starting June 1, it will reduce the amount of proceeds that it reinvests when bond holdings mature. The initial reduction will be at a pace of $47.5 billion per month ($30 billion in Treasurys and $17.5 billion in mortgage-backed securities). The amount will adjust to $95 billion per month ($60 billion in Treasurys and $35 billion in mortgage-backed securities) by September. So, the Fed is not selling its bond holdings in the open market. It is just not reinvesting proceeds. By the end of the year, at least $522.5 billion worth of maturities will no longer be reinvested in current bond holdings. Adding to the inflation problem is Russia’s invasion of Ukraine. The conflict and the resulting sanctions are creating shortages of energy, metals, and grains. As supplies dwindle, demand remains the same. Prices have risen in anticipation. European Markets closed mixed. European Central Bank Executive Board Member Fabio Panetta said the regional economy is “de facto stagnating” as inflation weighs on activity. The Bank of England released its latest policy announcement, raising interest rates (to 1%) for the fourth straight meeting while saying the economic growth outlook is worsening. French Industrial Production figures for March declined more than expected as automobile and transportation material manufacturing slowed. German Factory Orders for March were weaker than anticipated due to easing demand for metal production and automobiles. In Asia, Equity markets in Japan and South Korea were closed for holidays. Bank of Korea Senior Deputy Governor Lee Seung-Heon said economic uncertainty will remain high due to the Ukraine conflict while recent weakness in the Won must be closely monitored. The People’s Bank of China said it held a meeting to discuss policies it can implement to support the economy as well as the “health development” of technology companies. Caixin China Composite Purchasing Managers’ Index (“PMI”) data for April dropped versus March, marking its lowest level since February 2020 due to weak services-sector activity. Elsewhere, Oil rose 0.52% after the oil cartel OPEC said it would maintain present production plans, while Gold fell 0.82% on a stronger Dollar.
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