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Market Update

Uncertainty continues as markets respond to imminent rate hikes, war in Ukraine

Date:
April 25, 2022

Summary

Inflation and global turmoil continue to plague the international markets as the war in Ukraine persists. Market expectations in response to impending further rate hikes by the Federal Reserve pushed stocks down and bond yields higher. Stronger relative performance in the U.S. pushed the dollar to near two-year highs, while smaller and less developed countries experienced greater volatility.

Global economic growth feeling the pain from international turmoil and rising inflation

Last Tuesday in its quarterly World Economic Outlook report, the International Monetary Fund (IMF) projected that global economic growth would slow significantly this year, driven primarily by the ongoing war in Ukraine. The IMF predicted a 3.6% expansion this year, down from 6.1% last year. This prediction is 80 bps lower than the projection in January and 130 bps lower than the October 2021 estimate. The organization attributed the decreases primarily to the war in Ukraine and its disruptions in global trade and the resulting higher food and energy prices. Forecasts predicted Ukraine’s and Russia’s economies would shrink by 35% and 8.5% respectively this year, with the rest of Europe and the global economy also feeling the effects of severe economic sanctions against Russia.

The overall explanation of the IMF’s lukewarm growth predictions is, simply put, tremendous uncertainty. In addition to the war in Ukraine, the IMF cited continuing COVID-19 supply chain disruptions as well as increasing inflation driving potentially more hawkish measures from policymakers. These actions could then slow growth in wealthier countries while driving greater debt distress for more heavily indebted corporate borrowers and lower-income nations (who are already being disproportionately affected by higher food and energy prices).

U.S. dollar continues upward climb

The U.S. dollar recently reached its highest point in nearly two years, as impending rate hikes from the Federal Reserve and strong U.S. growth proved inviting for investors concerned about turmoil abroad. Most expectations suggest that this strong U.S. growth will outpace foreign markets as the Fed continues to signal a series of continued interest rate increases as inflation continues rising. However, some projections over the course of the year expect the dollar to slip, citing unique and one-off macroeconomic events driving a large portion of the gains. As markets continue to carefully monitor the political and economic outlook of the global economy throughout the ongoing Ukraine conflict and Federal Reserve actions in the U.S., corporates may look to hedge exposures amid macroeconomic uncertainty and potentially increasing market volatility in the weeks and months ahead.

Bond yields rise, stocks fall in anticipation of further rate hikes

Federal Reserve Chairman Jerome Powell suggested Thursday that the central bank will likely raise rates by 50 bps at its meeting in May in a continuing effort to combat inflation. This would be the first time since 2006 that the central bank hiked rates in consecutive meetings and the first time since 2000 that rates increased by 50 bps. In response to this affirmation, stock markets slid on Thursday, erasing gains from earlier in the week in response to generally favorable earnings reports. This downward pressure on stocks came as a large government bond selloff pushed bond yields higher. Whereas the labor market and corporate earnings have proven resilient even despite severe market uncertainty, the market will likely witness a mixed bag going forward.

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Looking ahead

The global economy will continue to see a tremendous degree of uncertainty in the coming weeks. Despite its own domestic volatility, expect to see the continued relative strength of the U.S. economy and dollar as foreign markets suffer heavier comparative effects from the war in Ukraine, supply chain disruptions, and international response to U.S. rate hikes.

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Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

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