Central banks around the world continue to fight inflation

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Published Date 12/16/2022

Since Wednesday when chairman Powell doused market beliefs the Fed would become more dovish toward fighting inflation in deference to driving the economy into recession equity markets have buckled. There was a consensus that with inflation slowing and economic outlooks for 2023 softening that the Fed would ease its aggressive attack on inflation. Powell made it clear that the Fed is isn’t going to let anything stand in its way ending inflation, even a possible recession. The reaction sent stock indexes down hard yesterday and this morning in futures trading prior to the 9:30 am ET open the indexes were under more pressure (-330 at 8:30 am on the DJIA).

After Powell and all other key central banks increased their base rates US and global recession concerns increased. All central banks saying the same thing, kill inflation at any cost. Economists now see a 60% probability of recession in the US and an 80% chance in Europe. Equity analysts have cut 12-month earnings estimates for the regions to the lowest levels since March and July, respectively.

Today is quadruple witching, expirations of options and futures contracts. $4 trillion of options is expected to expire today in a monthly event that in tends to add turbulence to the trading day. This time, with the S&P 500 stuck for weeks within 100 points of 4,000, the potential of volatile activity is high today.

The 10 began the day at 3.51% +6 bps, MBS prices down 33 bps.

At 9:30 am the DJIA opened -233, NASDAQ -39, S&P -24. 10 yr. note +9 bps to 3.54%. FNMA 5.5 30 yr. coupon -33 bps and -26 bp from 9:30 am yesterday.

The Fed has 50 to 75 bps more to increase the FF rate to 5.0%. Not a debate anymore after Wednesday’s data. The US and the world moving to recession in 2023 although most analysts and economists see it as a “Zoom recession,” short and not too severe. The U.S. Federal Reserve in new economic projections this week did not explicitly jump into the recession camp, and Fed Chair Jerome Powell said he feels the country can maintain "modest" growth and sees only a "modest" increase in unemployment even as the Fed deliberately tries to slow things down to cool inflation. "I don't think it would qualify as a recession," Powell said of the growth rate penciled in by policymakers.

Source: TBWS

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