Fed Minutes Show Bankers Likely to Reduce Balance Sheet by $95 Billion per Month, Starting in May… The minutes from the March FOMC meeting reflected consensus on letting almost $100 billion in bonds mature each month and indicated that the bankers are concerned about losing credibility.
What it means— Well, that’s going to leave a mark. The volatility following the announcement showed that investors and algorithms aren’t sure what to make of the Fed’s path, but they don’t seem happy so far, as the general direction is down. The central bank reduced its balance sheet just once before, from 2017 to 2019. Back then, the economy was expanding because of tax cuts, inflation was low, and the bankers were letting the bonds run off at just $50 billion per month. This time around, we’re starting with inflation at 8% and the bankers will reduce their holdings at almost twice the pace if their actions match their speeches.
It’s all about flow. The Fed has given the equity and bond markets an incredible lift by pumping $5 trillion extra dollars into the system since March 2020. All that extra cash found its way into asset prices. Now that the Fed has turned off the air supply that pumped up the asset bubbles and plans to start letting air out, investors must figure out what assets are really worth. We haven’t had true price discovery in more than a decade. Expect a lot of volatility and a downward slope.
Reducing the Fed’s balance sheet will reduce demand for longer dated bonds forcing interest rates higher. The correlated market action is for mortgage rates to rise slowing home sales and construction. Then recession risk rises which may cause the Fed to abandon its current plan to reduce inflation. One more reason markets will be volatile and new highs hard to achieve in technology and growth sectors.
Russian Ruble Recovers All Losses Since War Began… One U.S. dollar bought 82 rubles the day before Russia invaded Ukraine. The rate quickly fell to 139 rubles per dollar but has since recovered to 79.4 rubles per dollar.
What it means— It’s not as if the Russian economy is bouncing back. Instead, the Russian government now requires all banks to exchange foreign proceeds (think oil sale revenue) for rubles, thereby boosting the home currency value. The government also implemented severe capital controls that limit any conversion of rubles into foreign currency. This one-way exchange pushes up the value of the ruble but doesn’t reflect economic activity.
Russian Oil Production Down a Mere 5%… Russian oil production appears to be running at just under 10.5 million barrels per day, down 5% from a pace of 11 million barrels per day before the war.
What it means— They’re pumping the oil, but can they sell it and deliver it? As reported last week, Russia is racing against time to get oil out of the door, because the nation is running out of storage. Eastern nations such as China, India, and Japan are helping by purchasing Far Eastern Russian Urals oil at discounts of up to $40 from spot. While most if not all Urals oil production for the next two months is spoken for, Russia still has a lot of oil that doesn’t have a home. Russian oil companies in the Western section of the nation might have to cap wells soon.
The Chinese have stepped up to buy more Russian oil and are filling their strategic reserve just as the U.S. and other nations are selling oil from their strategic reserves. You can think of it as a transfer of oil from Western reserves to the Chinese, but they’re buying Russian oil at a big discount instead of buying our expensive oil.
Indian Man Takes Matters into His Own Hands To Get Bag Back… Nandan Kumar flew from Patna to Bangalore on IndiGo Airlines. At his destination, he and another passenger with very similar bags mistakenly picked up each other’s luggage off the carousel. Kumar tried IndiGo customer service several times, but the airlines never connected him to the other passenger or set up a way to exchange the luggage, so Kumar decided to do it Himself.
Using his web developer skills, Kumar hopped onto IndiGo’s website and, armed with the other passenger’s name from the luggage tag, eventually found a way into IndiGo’s reservation system. Kumar contacted the other passenger, exchanged bags, and then sent an email to IndiGo telling them to improve their customer service as well as their online security.
Data supplied by HS Dent Research
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