21 March 2022
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Fed members open to more aggressive tightening


By Emirates NBD Research

  • Two of the Federal Reserve's most hawkish policymakers on Friday signaled the central bank needs to take more aggressive steps to fight inflation, and two others said they would be open to it. Minneapolis Fed President Neel Kashkari said in an essay published on the regional Fed bank's website that the economy may have shifted to a high-pressure, high-inflation equilibrium, requiring the Fed to act more aggressively and bring policy to a contractionary stance in order to move the economy back to an equilibrium consistent with our 2% inflation target. Also on Friday, Fed Governor Chris Waller said economic risks around Russia's war in Ukraine led him to vote in favor of a quarter percentage point rate increase at this week's meeting rather than dissent in favor of the larger half point increase he had been advocating. St. Louis Fed President James Bullard, who dissented on this week's action in favor of a half point increase, said on Friday that officials should raise the Fed's overnight lending rate to more than 3% this year to catch up with elevated inflation. He added he not only favored a half point increase this week, but rate increases at a pace that would require half point increases at five of the Fed's six remaining meetings this year. A fourth Fed policymaker, Richmond Fed President Thomas Barkin said he is very open to a half-point rate hike if inflation accelerates, or expectations move up. But, he added, that setting the pace is a balancing act between raising rates enough to contain inflation but not so much it hurts jobs.  Though most Fed officials see six more quarter-point rate increases this year, seven of the Fed's current 16 policymakers, like Bullard, think rates should go even higher by year's end.
  • US Existing home sales dropped 7.2% y/y to a seasonally adjusted annual rate of 6.02mn units last month, the largest decrease since February 2021, the National Association of Realtors said on Friday. While the decline reversed January's jump, sales remained above their pre-pandemic level. Mortgage rates surged in February, with the 30-year fixed rate approaching a 3-year high. Home resales account for the bulk of US home sales. They dropped 2.4% y/y basis in February. While low by historical standards, mortgage rates are set to increase further after the Federal Reserve on Wednesday raised its policy interest rate by 25 basis points, the first hike in more than three years. The median existing house price increased 15% y/y from a year earlier to USD 357,300 in February. There were 870,000 previously owned homes on the market in February, down 15.5% y/y. House prices have increased on a y/y basis for a record 120 straight months. In a sign of market strength 84% of homes sold in February were on the market for les than a month. However, the combination of higher mortgage rates and rising homes prices amid a prolonged housing shortage will reduce affordability, especially for first-time buyers.
  • Russia's central bank kept its key interest rate at 20% on Friday following last month's massive emergency hike in which it doubled the key rate to 20% from 9.5% in a one-off action on Feb. 28. The central bank said it would start buying government bonds, warning of an imminent spike in inflation and a looming economic contraction. Governor Elvira Nabiullina, who was nominated for a third term by President Vladimir Putin earlier on Friday, said the central bank will start buying the government bonds on the market when the Moscow Exchange resumes trading of the bonds on Monday. Annual inflation in Russia accelerated to 12.54% as of March 11, its highest since late 2015, with the weakening rouble sending prices soaring amid unprecedented Western sanctions. Nabiullina said that spike was driven largely by panic-buying of consumer goods, which had now slowed.
  • Saudi Aamco’s net income surged to USD 110 billion in 2021, more than double the figure of USD 49bn from a year earlier, Aramco said yesterday. The company is looking at increasing capital expenditure to between USD 40bn and 50bn this year, compared with USD 32bn in 2021. The company kept its dividend for 2021 unchanged at USD 75bn, however Aramco said it would issue one bonus share for every 10 shares owned. The Saudi government holds 98% of the stock.
  • Egypt has budgeted for a deficit equivalent to 6.3% of GDP in the fiscal year starting in July, compared to a projected 6.8% in the current year, with spending forecast to rise 16%. Over the weekend the government announced that it would control the price of free market, unsubsidised bread in an effort to curb price growth as global wheat prices surge – the North African country is highly reliant on exports of Ukrainian and Russian supplies.

Today’s key economic data releases and events

11:30 EU ECB President Lagarde Speaks                                  

18:00 US Fed Chair Powell Speaks                              

Fixed Income

  • US Treasury markets sank last week as the Federal Reserve outlined a much more hawkish path of policy normalization than had been expected. The Fed and the market are now roughly aligned in terms of rate expectations for this year though the risk of an over-aggressive tightening path is prominent given the anticipated slowdown in the economy. Yields on the 2yr UST added almost 19bps last week to 1.9362% while the 10yr yield added nearly 16bps to 2.1494%.
  • European bonds showed similar moves with German 2yr yields up almost 7bps last week to -0.35% while the 10yr bund yield gained 12bps to 0.37%. The Bank of England also raised rates at its meeting last week but with less of an aggressive stance than the Fed. Gilt yields on the 2yr fell over the week by almost 11bps to 1.1980% while the 10yr gilt closed the week relatively steady at 1.495%.


  • The US dollar pulled back somewhat last week, closing the five days at 98.233 on the DXY index, down around 0.9%. EURUSD managed a gain of 1.3% over the week, settling in at 1.1051 even as the near term risks to the Eurozone economy remain high. In Japan the yen continues to lose ground against the dollar, with USDJPY up 1.6% last week to 119.17. GBPUSD rose more than 1% last week, closing at 1.3178 despite a more moderate outlook from the Bank of England.
  • In commodity currencies, USDCAD moved in favour of the loonie with the pair settling at 1.2603, down 1.1%. AUDUSD added almost 1.7% at 0.7415 while NZDUSD closed up 1.45% at 0.6908.


  • Global equity markets had a far stronger week last week, pulling back some of the losses seen since the start of the war in Ukraine and the subsequent hike in commodity prices. Softer commodity prices helped, while traders also looked out for any positive headlines from Eastern Europe.
  • In East Asia, the government’s pledge to support markets after the tech rout seen at the start of the week saw gains for key indices over Wednesday to Friday. The Hang Seng added 4.2% w/w, but the Shanghai Composite still closed down, losing 1.9% compared to the previous Friday.
  • There were strong gains in European equity markets. The FTSE 100 added 3.5% w/w while the CAC and the DAX both gained 5.8%.
  • In the US, the Dow Jones, the S&P 500 and the NASDAQ added 5.5%, 6.2% and 9.2% respectively over the week.


  • Commodity prices eased back generally last week even as trading remains highly volatile. Oil prices fell over the week in both Brent and WTI with Brent futures settling down 4.2% at USD 107.93/b and WIT off by the same amount at USD 104.70/b. However, both were gaining some momentum toward the end of the week as there was no clear sign of a de-escalation of the war in Ukraine.
  • A large pull in favour of risk assets helped to push gold lower last week, falling by more than 3.3% to USD 1,922/troy oz. The push lower was mirrored across the rest of the precious metals complex with palladium taking a hit of more than 11% to close at just under USD 2,500/troy oz.

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Written By


Emirates NBD Research Research Analyst

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