(Reuters) The US Federal Reserve, the Bank of England, and the Reserve Bank of Australia all have policy meetings this week.
People might worry more about the yuan if China’s economy isn’t doing well, but Russia doesn’t seem to have defaulted on its debt for the time being.
And did someone mention the dollar?
Ira Iosebashvili and Tom Westbrook are in New York, Dhara Ranasinghe and Sujata Rao are in Sri Lanka, and Karin Strohecker and Dhara Ranasinghe are in London.
1/THE HAWKS ARE FLIGHTING
On Wednesday, we’ll find out how aggressive the central bank plans to be in the coming months. The Fed’s rhetoric has led to violent stock and bond market sell-offs.
On May 4, the Fed signaled a 50 basis-point rate hike, and investors anticipate a big 240 basis-point tightening in 2022. Numerous economists believe the Fed will continue to surprise on the hawkish side as it battles to contain the worst inflation in four decades. [L2N2WK2GX]
Markets will also be watching the Fed’s plans to dismantle its almost $9 trillion balance sheet, which may begin as early as May.
2/Four in a Straight Line
The Bank of England’s meeting, which follows the Fed, is expected to raise interest rates for the fourth consecutive time, the first time since 1997.
Andrew Bailey, the Bank of England’s governor, says the bank is walking a “very fine line” between containing inflation, which is already more than three times its objective of 2%, and averting a recession.
A quarter-point increase to 1% would satisfy a prerequisite for the Bank of England to begin aggressively selling its bonds. The main thing that worries the market is when these sales will happen. Forecasts range from June to far into 2023.
No major central bank has yet started selling bonds to tighten the money supply. This could hurt a weak economy, and no central bank has yet started.
DOLLAR THE DEVIL 3/DOLLAR
April is reputed to be the cruelest month of the year, and it has undoubtedly been so for anybody on the losing end of the dollar trade.
In addition to safe-haven flows and an ultra-hawkish Federal Reserve, there has been a 5% rise in the dollar index. This has led to significant declines in the euro and yen, as well as emerging market currencies, led by the yuan. led
Global financial conditions are tightening as a result of the changes, which may cause economic development to stagnate. Japanese, German, and other companies face increased import expenses for dollar-priced goods and components.
Certain previous Fed tightening cycles undermined the US dollar after they began. This time, though, analogies to 1994 are being made, when 300 basis points of rate increases increased the dollar index by 4.6 percent (following a 10.5 percent jump in 1993). These actions were credited with precipitating successive rounds of developing market crises.
4/Australia to China:
The yuan, which fell 4% in April, may fall even more after Sunday’s data showed that factory activity fell at a faster rate in April because of widespread COVID-19 lockdowns that halted industrial production and disrupted supply chains. This raised fears that China’s economy will slow down even more in the second quarter, which will hurt global growth.
For the time being, Beijing seems to view the yuan as its primary policy tool, much to the dismay of stock markets that had anticipated for more explicit government assistance. As China’s economy has slowed, the Australian dollar has also dropped by about 4.5 percent in April.
With recent statistics indicating that Australian first-quarter inflation reached a 20-year high, speculation is growing that a hike cycle might begin as early as Tuesday. Some experts predict a 15 basis point rise in rates this year.
Debt & Gas
Moscow has escalated its spat with Western cities overpayment for gas imports. It has stopped delivering gas to Poland and Bulgaria because they didn’t pay in euros when it asked them to.
Even though the European Commission has warned that transferring roubles could break sanctions, authorities aren’t sure what the European Union thinks about Moscow’s payment system.
The elephant in the room is Germany. It uses a lot of Russian gas, and if supplies are cut off, the economy could go into recession.
Meanwhile, Russia made a last-ditch payment in US dollars on Tuesday, ostensibly averting an impending national default on Wednesday. A senior Washington official verified that the payment was paid without dipping into the United States’ frozen reserves.
