Markets price in latest Federal Reserve news as inflation, energy prices continue to rise
Summary
Global stock indices fell last week amid persisting inflation fears and subsequent expectations for more aggressive rate hikes. Domestically, fears that the Fed’s attempts to curb inflation will push the U.S. economy into a recession exacerbated investor concerns. Markets temporarily rebounded in response to the Fed’s mid-week announcement but quickly regressed, as apprehension about the direction of the market environment pushed investors away from stocks and towards U.S. Treasuries. In commodity markets, energy price levels continue to climb, placing more upward pressure on inflation.
Federal Reserve raises rates again, markets react
The Fed announced a 75 bp rate increase on Wednesday, the largest increase since 1994. This move came in response to inflation reaching a new 40-year high, although Fed Chairman Jerome Powell noted that he “[did] not expect moves of this size to be common.” The latest in a series of rate hikes is not expected to be the last on the path to an intended soft landing. Amid fears of impending inflation leading up to the announcement, Powell added that slowing inflation without a recession“ is not getting easier,” citing persisting supply chain disruptions and rising energy and commodity prices.
U.S. stocks rebounded temporarily following the Fed’s approval of the rate increase in response to Jerome Powell’s assurance that Wednesday’s increase was a rare occurrence. Markets took these statements as an indication of the Fed’s intent to remain ahead of inflation, rather than reactionary. U.S. Treasuries also rallied after a recent selloff, bringing yields considerably lower; the 10-year Treasury yield settled near 3.389% on Wednesday, down from 3.482% the previous day. Despite this initial rally, stocks fell again on Thursday as markets continued to evaluate the current environment and adjust projections. Further encouraged by this slide in stocks, investors continued to double down on U.S. treasuries, pushing yields down further.
(Related insight: Register for the webinar, "Semiannual Market Update for Corporations")
Major movements in natural gas prices in the U.S. and Europe
Energy prices continue to be a major pain point for global corporates. U.S. natural-gas futures rose 3.2% on Wednesday, driven by foreign demand, after dropping 16% on Tuesday. The 16% drop came in response to an LNG (liquefied natural gas) shipping facility in Texas announcing reduced export capacity due to a fire the week prior — providing more domestic supply for storage until demand reaches its highest in the winter. Prices began climbing back up on Wednesday in part due to announcements by Russia’s state-owned energy company, Gazprom PJSC, that it would be reducing its supply of gas to both Germany and Italy, citing technical issues. Benchmark European gas prices increased by 24% on Wednesday in response to these events, the most recent addition to a 52% rally from the prior week.
This throttling of gas supply to the rest of Europe poses a dire challenge for European countries. According to a gas analyst’s comments to the Wall Street Journal, if Russia were to continue pumping this new amount of gas each day, the EU would be short around 17%, or 13.5 billion cubic meters, of the gas it originally aimed to have in storage by November. These new struggles only serve to further amplify struggles in Europe to combat inflation in the region, which reached an annual level of 8.1% in May, up from 7.4% in both April and March.
(Related insight: Read "5 lies corporates tell themselves about commodity risk")
Looking ahead
Central banks around the world set their sights on tackling inflation in the past few months, and recent efforts to double down on this endeavor have so far proved ineffective. A series of rate hikes both in the U.S. and abroad could potentially curb the rapidly rising price levels, driven by skyrocketing gas and energy prices due to the ongoing conflict in Ukraine.
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