More aggressive action from the Fed looking likely

• Lael Brainard, the nominated vice-chair of the Federal Reserve, said that lowering inflation was “paramount” and that the Fed would start to unwind its balance sheet as early as next month. Details on the Fed’s plan are due to be released along with the minutes of the March FOMC meeting out later this evening. Brainard also indicated that the Fed would be prepared to “take stronger action” if inflation or expectations didn’t decelerate following the start of tightening policy.
• The March ISM services index in the US rose to 58.3 from 56.6 a month earlier, thanks to moves higher in employment and new orders. Along with a healthy print in the manufacturing index at the end of last week, the US economy appears to have had a decent first quarter of 2022 even as inflation pressures and expectation of higher interest rates weigh on the outlook. Like the manufacturing sector, input prices also moved higher as inflation entrenches across the US economy.
• The Caixin services PMI in China fell to 42 in March from 50.2 a month earlier, its lowest reading since the start of the Covid-19 pandemic in early 2020. China is currently using heavy lockdowns to control outbreaks of the virus in major economic centres—the entire city of Shanghai is under some form of lockdown as the government carries out mass testing. According to the PMI, new business activity was at its lowest since March 2020 while new exports were also at 2020 lows.
• The Abu Dhabi Statistics Centre reported growth of 1.9% in the emirate last year with the non-oil sector growing by 4.1% y/y. That compares with an estimated drop of 7.7% in 2020 caused by the Covid-19 pandemic. In 2021, several sectors reported strong growth with health and social services up almost 20%, arts and entertainment up by 17% and wholesale and retail trade up by 15%.  
• Oman’s ministry of finance has reported a budget surplus of OMR 210mn at the close of February, a marked improvement from the OMR 457mn deficit recorded a year earlier. The difference has been the far higher oil prices, and oil revenues were up 81.4% y/y to OMR 1.1bn.

Today’s Economic Data and Events

• 09:00 India Composite PMI March
• 10:00 GE Factory orders Feb y/y: forecast 5.4%
• 22:00 US FOMC Minutes March

Fixed Income

• US Treasuries sold off sharply on the hawkish tone from Fed governor Brainard as well as from Esther George, president of the Kansas City Fed, who explicitly said a 50bps hike was on the table for the May FOMC. Yields on the 2yr UST soared 9bps to 2.5139% while the 10yr moved up more than 15bps to 2.5469%. That helped to normalize the 2s10s curve back to a bit more than 2bps after having closed the last three sessions inverted.
• European bond markets were also weaker overnight as hawkish sentiment permeates markets and as the EU prepares new sanctions on Russia, this time directly targeting the energy sector via Russia’s coal exports. EU president Ursula von der Leyen will also push a debate on banning Russian oil from the EU. Gilt yields added almost 11bps to close at 1.651% while the 10yr bund yield rose almost 11bps to settle at 0.609%.

FX

• The dollar pushed higher along with US Treasury yields with the DXY index up almost 0.5% to 99.472. The Euro and Yen provided much of the move for the dollar; EURUSD fell 0.6% to 1.0905, its fourth day in a row of declines, while USDJPY added 0.7% to push up to 123.60 at the close. GBPUSD also weakened, down 0.3% at 1.3074.
• In commodity currencies AUDUSD was the outperformer as the central bank in Australia begins to lean hawkish, even if heavily caveated. AUDUSD added 0.48% to 0.7579. USDCAD closed roughly flat as did NZDUSD.

Equities

• The prospect of a more rapid unwinding of the balance sheet weighed on US equities yesterday, with all three major benchmarks closing down by the end of session. The Dow Jones, S&P 500 and the NASDAQ lost -0.8%, -1.2% and -2.3% respectively.
• Equities were mixed in Europe earlier in the day. While the FTSE 100 gained 0.7%, the DAX (-0.7%) and the CAC (-1.3%) both closed lower.
• Locally, the DFM lost -0.5% but the ADX and the Tadawul both closed up 0.3%.

Commodities

• Oil prices dipped overnight as the market waits for direct EU sanctions on Russian energy exports. Brent futures closed down 0.8% at USD 106.64/b while WTI dropped 1.3% to USD 101.96/b. The strong pull in the dollar is also weighing on oil in the near-term.
• Data from the API showed a 1.1m bbl build in US crude stockpiles last week, including a gain at the Cushing, OK pricing point. Gasoline inventories were lower while distillates ticked higher. 

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