Economy

Will the Federal Reserve raise interest rates for the first time since 2018?The US Federal Reserve is widely expected to raise interest rates by 0.25 percentage points at its meeting next week for the first time since slashing borrowing costs to zero at the start of the coronavirus pandemic. In testimony before Congress earlier this month, Fed chair Jay Powell said the US central bank was prepared to begin a series of interest rate increases beginning in March, despite Russia’s invasion of Ukraine and the ensuing economic fallout. Currently, the US futures market is fully pricing in a quarter-point raise in March, with another five expected over the remaining six meetings this year. That would leave the Fed’s key interest rate at roughly 1.5 per cent by December. The hope is that higher interest rates will help quell inflation, which in February rose by 7.9 per cent year on year — the fastest pace in 40 years. While it may dampen some inflationary pressures, tighter monetary policy cannot deflate prices driven higher by external shocks such as the conflict in Ukraine, which has sent energy and other commodity prices soaring. Powell is also expected to address concerns about US economic growth. High energy prices raise costs for companies and individuals. Tightening monetary policy too quickly in that environment could — in the worst-case scenario — tip the US into a recession.“In the case of inflation versus recession, I don’t care how bad inflation is, the Fed doesn’t want a recession because then that reverses all they’ve done with employment and the recovery,” said Andy Brenner, head of international fixed income at NatAlliance Securities. “Inflation is going to get worse before it gets better. But the Fed is limited in how quickly it can raise rates,” he added. Kate DuguidHow will the Bank of England respond to the Ukraine conflict?Investors expect the Bank of England to raise interest rates for the third time since the pandemic next week, despite the threat to growth posed by Russia’s invasion of Ukraine.UK inflation hit a 30-year high of 5.5 per cent in January, well before the impact of the dramatic rise in oil prices sparked by the outbreak of war and western sanctions on Moscow was felt. Given a sizeable minority of the BoE’s rate-setting committee voted for an extra-large half percentage point rate rise last month, “there is a degree of momentum for another increase”, according to Philip Shaw, chief economist at Investec.“We are taking the view that at this point, the [BoE] is more concerned about higher inflation than the risk of economic weakness, particularly with interest rates still very low by historical standards,” Shaw said.The BoE would hardly be swimming against the tide. The European Central Bank last week announced a faster reduction in the scale of its asset purchase programme, while the Fed is expected to raise rates.Beyond Thursday’s meeting, the prospects for further rate rises are likely to depend on the extent to which oil price rises feed through to other areas of the economy, particularly wages. Markets are currently braced for a further five interest rate rises before the end of 2022.The BoE “may well raise rates gradually until there are signs that the economy is slowing, that inflation pressures may be ebbing or that it is clear that pay growth remains relatively modest”, said Shaw. Tommy StubbingtonWill the gold price hit an all-time high?Increased volatility across global financial markets since Russia’s invasion of Ukraine has encouraged investors to look again to gold as a haven asset, its traditional role in periods of turmoil.The gold price peaked at nearly $2,070 this week, trading within touching distance of an all-time high of $2,072.50 hit in August 2020, according to Refinitiv data. But it later retreated below $2,000 — a key resistance level — despite fighting intensifying across Ukraine, leading to questions about the longevity of the precious metal’s rally.Gold’s ascent was supported by heavy buying from exchange traded fund managers. Gold-backed ETFs have seen a marked increase in demand so far this month, with investors adding 96.2 tonnes to their total holdings at a cost of more than $6.1bn by March 9.That has taken net investor inflows to almost $11bn so far this year, pushing the value of assets held in gold ETFs to $240.5bn, according to the World Gold Council, a trade body which represents gold producers.Geopolitical tensions have historically provided only a shortlived boost for gold. But Suki Cooper, precious metals analyst at Standard Chartered bank in New York, said a deeper shift in investor sentiment appeared to be unfolding as a result of the war in Ukraine and worries about the impact of inflation on other asset classes.Goldman Sachs last week raised its forecast for the gold price to $2,500 over the next six months, up from $2,050 previously. Goldman said it expected to see demand for gold increase this year from ETF investors, consumers in Asia and central banks.Moscow is set to buy all of Russia’s gold output this year after the Kremlin was blocked from accessing any foreign currency reserves held in offshore centres. This sanction on Russia is likely to encourage other central banks and governments to reconsider the place that gold holds in their foreign exchange reserves.“Central banks globally have both strong diversification and geopolitical reasons to shift [more] reserves into gold,” said Mikhail Sprogis, an analyst at Goldman. Chris Flood More

Consumers around the world will feel the “enormous impact” of Russia’s war on Ukraine through sharply higher food prices and significant disruption to agricultural supply chains, according to industry executives and leading European officials.John Rich, executive chair of Ukraine’s leading food supplier MHP, said he feared for the vital spring planting season, which is critical not only for domestic supplies in Ukraine but also the huge quantities of grains and vegetable oil that the country exports around the globe. “This conflict has had an enormous impact on Ukraine and Russia’s ability to supply the world,” Rich said. The success of the planting season would be decided by “military action in the next week or two”, he added, warning that it would be jeopardised if Russia’s army moved into the west of the country, which has remained relatively unscathed.Together with Russia, Ukraine is a leading grain and sunflower oil supplier to world markets, accounting for just under a tenth of global wheat exports, about 13 per cent of corn and more than half the sunflower oil market, according to UN Comtrade. Prices of the commodities soared after Russia’s invasion, with wheat at one point hitting an all-time high. Rich warned of “spiralling inflation” in the cost of wheat, corn and other commodities — prices of which were rising before the hostilities because of droughts and high demand as economies emerged from the pandemic. “It’s a pretty toxic mix,” he said.Since the conflict broke out last month, MHP has been pursuing humanitarian efforts from Slovenia, distributing food aid around Ukraine where millions of people have been displaced.With MHP drivers criss-crossing Ukraine to deliver food, Rich appealed for donations to continue the relief efforts. “If we fail then the distribution of food will also fail,” he said.

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The UN Food and Agriculture Organization has warned that up to 30 per cent of crop areas in Ukraine will either not be planted or be unharvested this year because of the conflict.Russia’s ability to export crops remains unclear because of the international sanctions, but the loss of export markets will hit the country’s farmers and lead to production declines, the UN body said in a report released on Friday. Ministers attending a G7 agriculture ministers meeting convened in response to the Russian invasion on Friday called on countries to avoid export bans and keep their food and agricultural markets open.The EU gets half its corn from Ukraine and a third of its fertilisers from Russia. Belarus, Russia’s ally, is another key fertiliser supplier. Fertiliser prices have risen sharply, with the surging price of natural gas, the main ingredient for nitrogen fertilisers, also threatening supplies. “From the EU perspective, this crisis has shown us that we have two sectors in particular where we have vulnerabilities . . . vegetable proteins and fertilisers,” Luis Planas, Spain’s agriculture minister, said in an interview. The supply chains from Ukraine and Russia were “broken” because of the virtual closure of the Black Sea ports.Planas said Spain did not have a food supply issue but flagged “a serious problem with animal feed”, with about 22 per cent of the corn fed to livestock in Spain coming from Ukraine. He called on the EU to ease restrictions on insecticide residues and GMOs to allow for more imports from Argentina and the US.Spain, he said, was “very worried about the price and supply of cereals in our immediate surroundings in the Mediterranean [region]”, including Egypt, Tunisia and Morocco. “We all have in mind the memory of 2011 and the Arab Spring” that was in part caused by high cereal prices, he added.In Brussels, EU member states are set to vote on a support plan for farmers hit by high costs and loss of exports on March 21.

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Janusz Wojciechowski, EU agriculture commissioner, said the plan included allowing farmers to grow food crops for animals on land left fallow to qualify for subsidies and a change in state-aid rules to permit governments to subsidise farmers suffering from high costs.He also said there was no risk of a food shortage in the EU, warning that the European Commission would take legal action against those such as Hungary that have banned grain exports.Farmers around Europe want concrete plans from governments and Brussels. In Ireland, amid talk of reviving a scheme last used in the second world war where farmers would be asked to grow extra grain, the head of Macra na Feirme, a farmers’ association, called for clarity on subsidies and tax incentives.“We’ve identified that food security is an issue [and] that feed security is an issue. But as farm leaders, we’ve no certainty about what’s on the table to address this,” said John Keane, its president. More

(Reuters) – Russia’s central bank on Saturday said it has decided not to reopen stock market trading on the Moscow Exchange from March 14-18, with the exception of some non-open-market transactions an transactions using the SPFI payment system.It said the foreign exchange market, money market and repo market would open at 0700 GMT on those days. The bank said it would announce the operating mode for the following week at a later date. More

COLOMBO (Reuters) – Sri Lanka’s Central Bank tightened trade restrictions on Saturday, ordering exporters to repatriate foreign exchange earnings within 180 days of transactions in a bid to improve country’s depleting foreign exchange reserves.Sri Lanka is tackling its worst financial crisis in over a decade, struggling to pay for critical imports including fuel, food and medicines and with just $2.31 billion of reserves.The bank’s moves include mandatory currency conversion for exporters of goods and services to change their foreign exchange earnings into Sri Lankan rupees. “All licensed banks are required to strictly monitor receipts of goods to Sri Lanka,” the central bank stated in a notification, adding that it “has the right to initiate action against non-compliance by any exporter or licensed banks”.The state-run oil company on Friday increased prices by 55 to 95 rupees (22-24 cents) per litre for most fuels to offset losses after Sri Lanka introduced a flexible exchange rate that saw the rupee plunge 30% to 260 rupees to the dollar.($1 = 250.0000 Sri Lankan rupees) More

Natsuo Yamaguchi, head of Komeito, the junior partner in Prime Minister Fumio Kishida’s coalition, said the measures were among steps needed to prepare for a further rise in prices of oil, wheat and other goods as a result of Russia’s war on Ukraine, a party spokesperson said, confirming media reports.Yamaguchi also urged the government to curb retail fuel prices by invoking a “trigger clause” allowing it to cut the gasoline tax in addition to existing energy subsidies, the spokesperson said. More

Russia has faced a slew of measures since launching its Feb. 24 invasion, the biggest attack on a European state since World War Two. Those hit by Friday’s sanctions include 10 people on the board of VTB Bank, the second-largest lender in Russia, and 12 members of the Duma, Russia’s lower house of parliament, the U.S. Treasury Department said in a statement.”Treasury continues to hold Russian officials to account for enabling Putin’s unjustified and unprovoked war,” Treasury Secretary Janet Yellen said.Putin’s spokesperson Dmitry Peskov was targeted on March 3. Friday’s measures extend to his wife and two adult children. They lead “luxurious lifestyles that are incongruous with Peskov’s civil servant salary,” the Treasury said in a news release.The Kremlin did not immediately reply to a Reuters request for comment. Four Novikombank board members, including chair Elena Georgieva, and ABR Management and four of its board members, including Bank Rossiya chair Dmitri Lebedev and Vice Governor of St. Petersburg Vladimir Knyaginin, were also targeted with sanctions, the State Department said. In mid-February, Russia’s lower house of parliament voted to ask Putin to recognize two Russian-backed breakaway regions in eastern Ukraine as independent. Eleven members and speaker Vyacheslav Volodin were added to the sanctions list on Friday. “Today’s designations further hold to account those actors who were directly responsible for Russia’s illegitimate and unlawful recognition … and facilitating the sham pretext used by Putin to justify the … unprovoked war against Ukraine,” the Treasury said. Justifying the move at the time, Volodin said: “Kyiv is not observing the Minsk agreements. Our citizens and compatriots who live in Donbass need our help and support.” The Minsk agreements are a pair of accords signed in 2014 and 2015 in the hope of ending violence between pro-Russian separatists in eastern Ukraine and the Kyiv government.Russia calls its actions in Ukraine a “special operation” that it says is not designed to occupy territory but to destroy its southern neighbor’s military capabilities and capture what it regards as dangerous nationalists. More

The Federal Reserve’s first increase in interest rates since before the pandemic was well broadcast, and markets may have little reaction if the central bank carries out its quarter-point hike Wednesday.
Investor focus remains on Ukraine, which continued to rattle markets in the past week, creating volatile swings in oil and sending stocks lower.
The Fed’s rate hike is expected, but investors will be watching to see what the central bank has to say about inflation and the economy, as well as its projections for future rate hikes.

A trader on the NYSE, March 11, 2022.
Source: NYSE

Investors may take the Federal Reserve’s first post-pandemic interest rate hike in stride, while uncertainty over the Ukraine crisis continues to hang over markets.
The Fed has clearly broadcast that it intends to raise its target fed funds rate by a quarter percentage point from zero, and it is expected to announce that move at the end of its two-day meeting Wednesday. The central bank should also reveal new forecasts for interest rates, inflation and the economy.

There are a few economic reports of note in the week ahead, including the producer price index Tuesday, retail sales Wednesday and existing home sales Friday.

“Earnings are over. Monetary policy is obviously going to be important here. I don’t see the Fed surprising anyone next week,” said Steve Massocca, managing director at Wedbush Securities. “It’s going to be a quarter point and then step into the background and watch what’s happening in Europe.”
Stocks fell for the past week, with the Nasdaq Composite the worst performer with a 3.5% decline. Meanwhile, the small-cap Russell 2000, which outperformed the three major indexes, lost 1% for the week.
A surge in oil prices spooked investors, with crude spiking to $130 at the beginning of the week but trading back below $110 on Friday.

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The S&P 500 was down about 2.9% for the week. Energy stocks were the top performers, up nearly 1.9% and the only positive major sector.

Fed ahead
The impact of Russian sanctions on commodities markets and the lack of clarity around the outcome of the war in Ukraine are likely to keep volatility high across the financial markets.
The central bank’s statement and comments from Fed Chair Jerome Powell on Wednesday will be closely watched for guidance on how central bank officials view the Ukraine crisis, and how much it could affect their outlook and the path for interest rates.
“His guidance is probably not going to be all that different from what he had to say in the [congressional] testimony. Basically, downside risks to the growth outlook have increased, upside risks to inflation have risen,” said Mark Cabana, head of U.S. short rates strategy at Bank of America.
Because Russia is a giant commodities producer, its assault on Ukraine and resulting sanctions have set off a rally in commodities markets that has made already-scorching inflation even hotter. February’s consumer price index was up 7.9%, and economists said rising gasoline prices could send it above 9% in March.
Gasoline at the pump jumped nearly 50 cents in the past week to $4.33 per gallon of unleaded, according to AAA.
Market pros see surging inflation as a catalyst that will keep the Fed on track to raise interest rates. However, uncertainty about the economic outlook could also mean the central bank might not hike as much as the seven rate increases that some economists forecast for this year.
Cabana expects Fed officials to forecast five hikes for 2022 and another four next year. The Fed previously anticipated three increases in both years. Cabana said the Fed could cut its forecast for 2024 to just one hike from the two in their last outlook.
Any comments from the Fed on what it plans for its nearly $9 trillion balance sheet will also be important, since officials have said they would like to begin to scale it back this year after they start hiking interest rates. The Fed replaces maturing Treasury bonds and mortgages as they roll off, and it could slow that in a process Wall Street has dubbed “quantitative tightening,” or QT.
“That they will be ready to flip the switch on QT in May is our base case, but we acknowledge there are risks that this will be skewed later,” said Cabana. He said if the Fed finds it is not in a position to raise interest rates as much as it hoped, it could delay shrinking the balance sheet right away, which would leave policy looser.

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Bond market liquidity
The 10-year Treasury yield topped 2% at its highest level Friday, after dipping below 1.7% earlier this month as investors sought safety in bonds. Bond yields move opposite price.
“It’s inflation and inflation expectations. Treasurys behave in this environment a little differently than a flight to quality asset,” Cabana said “That’s a different dynamic than we’ve observed. You may see a flight to quality into Treasurys, but the Treasurys are reflecting higher inflation expectations.”
Cabana said the markets are showing signs of concern around the uncertainty in Ukraine. For instance, the Treasury market is less liquid.
“We have seen that the Treasury market has become more volatile. We’re seeing bid-ask spreads have widened. Some of the more traditionally less liquid parts of the market may have become less liquid, like TIPS and the 20-year. We’re also seeing market depth thinning out,” he said. “This is all due to elevated uncertainty and lack of risk-taking willingness by market participants, and I think that should worry the Fed.”
But Cabana said markets are not showing major stress.
“We’re not seeing signs the wheels are falling off in funding or that counterparty credit risks are super elevated. But the signs there are very much that all is not well,” he said.
“The other thing we continue to watch loosely are funding markets, and those funding markets are showing a real premium for dollars. Folks are paying up a lot to get dollars in a way they haven’t since Covid,” he said.
Cabana said the market is looking for reassurance from the Fed that it is watching the conflict in Ukraine.
“I think it would upset the market if the Fed reflected a very high degree of confidence in one direction or another,” he said. “That seems very unlikely.”
Dollar strength
The dollar index was up 0.6% on the week and it has been rising during Russia’s attack on Ukraine. The index is the value of the dollar against a basket of currencies and is heavily weighted toward the euro.
Marc Chandler, chief market strategist at Bannockburn Global Forex, also points out that the dollar funding market is seeing some pressure but it is not strained.
“The dollar is at five-year highs today against the yen. That’s not what you would expect in a risk-off environment,” he said. “That’s a testament to the dollar’s strength.”

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Chandler said it’s possible the dollar weakens in the coming week if it follows its usual interest rate hike playbook.
“I think there might  be a buy the rumor, sell the fact on the Fed,” he said. “That’s typical for the dollar to go up ahead of the rate hike and sell off afterwards.”
Oil on the boil
Oil gyrated wildly this past week, touching a high not seen since 2008, as the market worried there would not be enough oil supply due to sanctions on Russia. Buyers have shunned Moscow’s oil for fear of running afoul of financial sanctions, and the U.S. said it would ban purchases of Russian oil.
West Texas Intermediate crude futures jumped to $130.50 per barrel at the beginning of the week but settling Friday at $109.33.
“I think the market getting bid up to $130 was a little premature,” said Helima Croft, head of global commodities strategy at RBC, noting the U.S. ban on Russian oil. She said the run-up in prices Monday came as market players speculated there would be a broader embargo on Russian oil, including Europe, its main customer.

“Right now, the market is too extreme in either way. I think it’s justified at $110. I think it’s justified over $100. I don’t think we’re headed for an off-ramp, and I think we have room to go higher,” she said.
Week ahead calendar
Monday
Earnings: Vail Resorts, Coupa Software
Tuesday
FOMC meeting begins
Earnings: Volkswagen
8:30 a.m. PPI
8:30 a.m. Empire State manufacturing
4:00 p.m. TIC data
Wednesday
Earnings: Lands’ End, Shoe Carnival, DouYu, Lennar, PagerDuty
8:30 a.m. Retail sales
8:30 a.m. Import prices
8:30 a.m. Business leaders survey
10:00 a.m. Business inventories
10:00 a.m. NAHB survey
2:00 p.m. Federal Reserve interest rate decision and economic projections
2:30 p.m. Briefing by Federal Reserve Chair Jerome Powell
Thursday
Earnings: FedEx, Accenture, Commercial Metals, Signet Jewelers, Dollar General. Designer Brands, Warby Parker
8:30 a.m. Initial jobless claims
8:30 a.m. Housing starts
8:30 a.m. Philadelphia Fed manufacturing
9:15 a.m. Industrial production
Friday
10:00 a.m. Existing home sales
2:00 p.m. Chicago Fed President Charles Evans

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Russia’s government said on Thursday it had proposed allowing foreign planes leased by Russian airlines to be registered as the airlines’ property, and for them to be given Russian airworthiness certificates.Western bans imposed after Russia’s invasion of Ukraine give most leasing firms until March 28 to sever ties with Russian airlines – sparking a game of cat-and-mouse from Asia to Africa as lenders frantically try to seize aircraft. Russia is trying to get around this by re-registering the foreign-owned planes in Russia, said one source familiar with discussions on the issue this week by the U.N. International Civil Aviation Organization (ICAO)’s governing council. Since most of the foreign-owned planes operated by Russian carriers under lease are registered in Bermuda, Russia will allow the aircraft to be dual registered, a second source said.ICAO said in an emailed response to Reuters that dual registration would not be consistent with Article 18 of the 1944 Convention on International Civil Aviation, known as the Chicago Convention, which says “an aircraft cannot be validly registered in more than one state.”Montreal-based ICAO said it has reached out to the Russian government requesting confirmation and more details but has not yet received a response. ICAO cannot impose rules on governments but sets standards overwhelmingly followed by its 193 member countries. More