So with FOMC today, I’m not sure I need to be doing a huge update. BUT, I did want to just point to a few things…
Yesterday a number of central banks globally increased their rates (everyone except Japan), and the US Dollar SOARED. Though it seems like this should be great, this will actually crush many emerging markets that hold their international debt in USD. Imagine if all your debt had 5% rate increase? We are technically seeing more global economies on the verge of collapse than before CoVid.
High Yield Corporate Bonds HYG and Corporate Bonds LQD are starting to catch up to each other to the downside, They’re back to Sept 2020 rates, and if they keep losing ground that is going to significantly pressure the Fed. Remember there are two core pieces to todays meeting: 1) Rate Hikes, 2) Balance Sheet Roll Off.
Bond markets were highly liquid because the Fed mandate was to keep bonds liquid for corporate ease as we begin seeing the pressure of CoVid. Now the Fed wants to let the bonds that reach maturity each month roll off, which will leave the treasury and banks that offered securities (including Mortgage Backed Securities) the obligation of finding NEW buyers.
Russia isn’t slowing down, and China seems to be feeling out the impact on if they were to be sanctioned, and signaling their central bank to start preparing themselves, which gives a new signal that China is considering invading Taiwan. We still have not realized many aspects of the commodities fall out from the Russia/Ukraine war. Commodities like Neon and Nickle are going to be very hard to come by, and both elements will negatively effect Chips. We will see how these issues shake out over the coming weeks.