“Shortly after the meeting minutes showed the Federal Reserve’s intention to move aggressively to head off inflation, the US dollar soared to a near two-year high against a basket of majors and pushed commodity currencies further down from recent peaks.”

Sam Cornford, Partner – Head  of Trading

Main Headlines

The Federal Reserve is set to start shedding up to $95bn of assets a month from its swollen $9tn balance sheet, as it steps up efforts to curb soaring inflation in the US. An account of the Federal Open Market Committee’s last meeting in March showed officials finalising a plan to reduce the central bank’s presence in US government bond markets. The Fed’s footprint in debt markets expanded significantly during the pandemic as it hoovered up trillions of dollars of Treasuries and agency mortgage-backed securities in an attempt to stave off an economic cataclysm. But faced with persistently high inflation, the Fed is now trying to tighten monetary policy; reducing the size of its balance sheet is the main lever it can pull to cool down the US economy, after raising interest rates. Members of the FOMC broadly agreed on monthly caps of about $60bn for Treasuries and $35bn for agency MBS, phased in over a period of three months or “modestly longer if market conditions warrant.”

The UK government has published its long-awaited Energy Security Strategy. Boris Johnson will today announce plans to increase Britain’s offshore wind power capacity fivefold by the end of the decade as part of a push to make 95% of the country’s electricity “low carbon” by 2030. The strategy, which comes in light of rising global energy prices and the Russian invasion of Ukraine, acknowledges the need to move away from fossil fuels. The new plan aims to accelerate the deployment of wind, nuclear, solar and hydrogen, whilst supporting the production of domestic oil and gas in the nearer term. The government has set a goal of 95% low carbon electricity by the end of the decade. Johnson has however held back from committing his government to a target for more onshore wind capacity, despite initially signalling support.

GBP

Sterling is well bid against most major currencies overnight. British business minister Kwasi Kwarteng said in a statement today that the government’s new energy strategy should help to reduce consumer energy bills within the next few years, as the cost of renewable resources fall. The proportion of EU workers in the UK hospitality industry has dropped to its lowest level since 2019, leaving restaurants, hotels and pubs struggling to afford pay increases to attract domestic staff. The UK government is pushing ahead with plans to create a new public body to oversee Britain’s energy system as it continues to transition away from fossil fuels, effectively renationalising critical responsibilities that have been held by National Grid since its privatization in the 1990s. Multiple NHS trusts across England have declared “critical incidents” amid soaring staff absences caused by Covid-19, with health leaders saying many parts of the service are now “in a state of crisis.”

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Ukraine wants sanctions that are economically destructive enough for Russia to end its war after accusing some countries of still prioritising money over punishment for civilian killings that the West condemns as war crimes. Meanwhile, Volodymyr Zelensky has pleaded with the international community to supply Ukraine with more weapons and impose tighter sanctions on Russia as the country’s military warned that Moscow was preparing an offensive in the eastern Donbas region. Hungary said on Wednesday it was prepared to pay rubles for Russian gas, breaking ranks with the European Union which has sought a united front in opposing Moscow’s demand for payment in the currency. Prime Minister Viktor Orban added that Hungary will also pay for shipments in rubles if Russia asks. Italy would support a ban on Russian gas imports if the EU is united behind it, Prime Minister Mario Draghi said.

USD

The dollar is weaker than most major currencies in the early morning trade. The US Justice Department announced yesterday that a Russian oligarch and media executive has been charged for violating US sanctions in an alleged scheme that involved hiring an American citizen to both run a Russian cable news network and secretly transfer a $10 million investment out of the US. Investors are buying more US farmland in search of a hedge against inflation as commodity shortfalls caused by Russia’s invasion of Ukraine drive world food prices to record highs. Land values ​​in the Midwest grain belt have gained 25-30 per cent in the past year while auctions draw intense bidding for available ground. Demand for land has picked up in the past month as the war in Ukraine and financial sanctions on Russia curtail critical exports of wheat and corn from the Black Sea region. The UN’s world food price index in February rose 24 per cent from a year earlier.

Markets

European stocks climbed after Wednesday’s sharp selloff and US equity futures stabilized as investors digested the implications of a hawkish Federal Reserve. The Stoxx 600 Index gained 0.2% at the open, led by healthcare and auto shares. S&P 500 futures were little changed. Brent crude edged above $102 a barrel. The euro strengthened and 10-year Treasury yields declined four basis points to 2.55%. Markets are working through the Fed’s plan to pare its balance sheet by more than $1 trillion a year while hiking interest rates. Commodity markets continue to be whipsawed by disruptions sparked by Russia’s war in Ukraine and efforts to curb raw-material costs. Oil rallied, paring a slump that was triggered by the International Energy Agency’s decision to deploy 60 million barrels from emergency stockpiles.

Main Economic Data/Central Banks/Government (All Times CET)

6:30 a.m.: Netherlands March CPI
8:00 a.m.: Germany Feb. industrial production
8:00 a.m.: Norway Feb. industrial production
8:00 a.m.: Sweden March budget balance
9:00 a.m.: Hungary one-week deposit rate
10:30 a.m.: Spain to sell bonds, linkers
11:00 a.m.: Euro area Feb. retail sales
1:30 p.m.: ECB minutes of March meeting
2:15 p.m.: BOE’s Pill speaks
2:30 p.m.: U.S. weekly jobless claims
Bank of Italy report on balance-sheet aggregates
Ukraine’s Volodymyr Zelenskiy addresses Greek parliament
Bloomberg Wealth Summit
The Masters begins at the Augusta National Golf Club

Corporate Events

Earnings include Constellation Brands, Conagra