Dow climbed 191, advancers over decliners 4-1 & NAZ rose 170. The MLP index gained 6+ to the 216s & the REIT index added 3+ to the 433s. Junk bond funds remained higher & Treasuries saw limited buying. Oil went up almost 1, closing near 111, & gold was off 12 to 1853 (more on both below).
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Federal Reserve officials earlier this month stressed the need to raise interest rates quickly & possibly more than markets anticipate to tackle a burgeoning inflation problem, meeting minutes released Wednesday showed. Not only did policymakers see the need to raise benchmark borrowing rates by 50 points, but they also said similar hikes likely would be necessary at the next several meetings They further noted that policy may have to move past a “neutral” stance where it is neither supportive nor restrictive of growth, an important consideration for central bankers that could echo thru the economy. “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings,” the minutes stated. In addition, Federal Open Market Committee members indicated that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.” The May 3-4 session saw the rate-setting FOMC approve the ½ percentage point hike & lay out a plan, starting in Jun, to reduce the central bank's $9T balance sheet consisting mostly of Treasuries & mortgage-backed securities. That was the biggest rate increase in 22 years & came as the Fed is trying to pull down inflation running at a 40-year high. Market pricing currently sees the Fed moving to a policy rate around 2.5%-2.75% by the end of the year, which would be consistent with where many central bankers view a neutral rate. Statements in the minutes, though, indicate that the committee is prepared to go beyond there. “All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability,” the meeting summary added. “To this end, participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve’s balance sheet,” it continued. On the balance sheet issue, the plan will be to allow a capped level of proceeds to roll off each month, a number that will reach $95B by Aug, including $60B Treasuries & $35Bn for mortgages. The minutes further indicate that outright sale of MBS is possible, with notice of that happening well in advance.
Fed minutes point to more rate hikes quicker than the market anticipates
Natural gas surged above $9 per M British thermal units, or MMBtu, hitting the highest level in more than a decade as dwindling inventories push prices higher. US prices surged more than 6% at one point to hit a high of $9.399 per MMBtu, the highest since 2008. The move is the latest leg higher in what's been a blistering rally for natural gas as Russia's war on Ukraine sends energy markets reeling...David Givens, head of natural gas & power services for North America at Argus Media, pointed to 3 key catalysts fueling the rally: little production growth, high liquified natural gas exports & storage levels that are roughly 17% below the 5-year average. Rapidly rising prices are adding to inflationary pressures across the economy. Drivers are already grappling with record high prices at the gas pump, & now utility bills are set to increase too. While utility companies might have once switched to coal as a cheaper alternative, coal-fueled power is also now in short supply with a number of plants going offline due in part to ESG — environmental, social & governance — concerns. Natural gas is now up nearly 30% in May, the 3rd straight month when gains have topped 20% & prices are now up around 150% for 2022.
Natural gas surges above $9, hits the highest since 2008 as inventories stay low
Ukraine Foreign Minister Dmytro Kuleba at the World Economic Forum in Davos, Switzerland. Kuleba discussed the Ukraine war, the reconstruction of his country & further sanctions against Moscow. Meanwhile, Ukraine's Pres Volodymyr Zelenskyy has said the situation in the Donbas in eastern Ukraine is “very difficult” with Russian forces concentrating their fire & manpower on assaulting the region & seizing key cities there. Zelenskyy said in his nightly address to the nation that “practically the full might of the Russian army, whatever they have left, is being thrown at the offensive there. Liman, Popasna, Sievierodonetsk, Slaviansk – the occupiers want to destroy everything there.” A Russian-backed official in the occupied Ukrainian port of Mariupol said the first ship to leave since pro-Russian forces completed their capture of the city would leave in the next few days. The official added that the ship would take around 3000 tons of metals to Rostov-on-Don in Russia. Earlier, Russia's defense ministry said that Mariupol's port, a shallow-water harbor on the Azov Sea, was “operating normally.”
Ukraine warns of multi-year food crisis; Zelenskyy says situation in Donbas ‘very difficult’
Precious metals closed lower, snapping a 4-day streak of gains, as investors braced for the release of the minutes from the Federal Reserve's 2-day meeting from earlier this month. Gold for Jun retreated roughly 1% ($19), to settle at $1846 an ounce. While precious metals like gold historically have been seen as safe haven assets, in recent months, it has tended to trade in the same direction as equity indexes. Today, gold remained lower, while US stocks edged higher, & despite the fact that Treasury yields, which move inversely to prices, were on the downswing.
Gold books worst fall in two weeks, snaps 4-day rally as Fed minutes loom
US economic growth will exceed 3% in 2022, while roaring inflation has topped & will cool each month to around 2% by some point in 2024, according to a gov forecast. The nonpartisan Congressional Budget Office (CBO) estimated that real GDP will grow 3.1% in 2022, driven by consumer spending & demand for services. It revised its estimates for GDP growth in 2023 & 2024 upward to 2.2% & 1.5%, respectively, but still below this year's pace. “In CBO’s projections, the current economic expansion continues, and economic output grows rapidly over the next year,” the report said. “To fulfill the elevated demand for goods and services, businesses increase both investment and hiring, although supply disruptions hinder that growth in 2022.” Here’s what the CBO sees for the US economy at the end of each year:
- Real GDP: 3.1% in 2022, 2.2% in 2023 & 1.5% in 2024.
- Inflation (measured by CPI): 4.7% in 2022, 2.7% in 2023 & 2.3% in 2024.
- Unemployment rate: 3.7% in 2022, 3.6% in 2023 & 3.8% in 2024.
- Federal funds rate: 1.9% in 2022 & 2.6% in 2023.
The upbeat tone of the report appeared to include an implicit prediction that the Federal Reserve, the central bank in charge of managing inflation, will be able to raise interest rates throughout 2022 & 2023 without tipping the US economy into a recession. While the CBO projects inflation will stay well above the Fed's 2% target throughout 2022 & 2023, it also said it's likely that the pace of price increases won’t rise above current levels. The CBO believes that the Fed, to counteract inflation, will hike its benchmark overnight interest rate to 1.9% by the end of 2022, well below the market's expectation for a figure north of 2.5%.
CBO boosts U.S. GDP growth estimates, says inflation has topped and will cool to 2% by 2024
Oil futures ended higher after official data showed a fall in US crude & gasoline inventories ahead of the start of the summer driving season over Memorial Day weekend. West Texas Intermediate crude for Jul rose 56¢ (0.5%) to close at $110.33 a barrel. Jul Brent, the global benchmark, settled at $114.03 a barrel, up 47¢ (0.4%). The Energy Information Administration said US crude inventories fell 1M barrels last week, as refiners ramped up activity in response to an expected rise in seasonal gasoline demand, while gasoline stocks dropped 500K barrels & distillate stocks rose 1.7M barrels. Analysts had looked for crude to show a rise of 100K barrels, while gasoline supplies were seen down 500K barrels & distillates up 600K barrels. The American Petroleum Institute said US crude inventories rose 567K barrels last week. Gasoline supplies fell 4.2M barrels, while supplies of distillates were down 949K barrels. Energy Secretary Jennifer Granholm was asked if the Biden administration was weighing restrictions on petroleum exports to put a lid on gasoline & diesel prices. “I can confirm the president is not taking any tools off the table,” Granholm said. The EU continues to negotiate toward a ban on imports of Russian oil & other sources of energy, with a meeting of EU leaders at the end of the month looking less likely to produce a final agreement.
Oil ends higher after data shows fall in U.S. crude, gasoline inventories
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