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Federal Reserve

The Fed is expected to raise interest rates by 50 basis points in May and June, according to a Reuters poll. 85 of 102 economists forecast a 50 basis point rate hike in May

56 of 102 economists forecast a follow-up 50 basis point rate hike in June

Fed funds rate now expected to be at 2.00 percent – 2.25 percent at the end of the year (previously 1.50 percent – 1.75 percent)

Fed funds rate then expected to be at 2.50 percent – 2.75 percent at the end of 2023

That’s an aggressive stance, but it’s consistent with what we’ve been hearing from Fed policymakers recently.

But, once again, how will the economy react to all of this when rate hikes aren’t exactly the answer to rampant inflation?

It will be interesting to see how the Fed can get away with an unhindered path to 2% given the economic backdrop.

If they do get there, it will be a short-lived one, as rate cuts will almost certainly return to the table soon as the economy slows. Some polled analysts are already calling for this in the fourth quarter of 2023.

“Given the shift in official commentary and the presence of inflationary pressures throughout the economy, we believe the Fed will deliver half-point interest rate increases at the May, June, and July policy meetings.”

With the Fed appearing to feel the need to ‘catch up’ in order to regain control of inflation and inflation expectations, the Fed’s rapid-fire pace of aggressive interest rate increases raises the risk of a policy misstep that could tip the economy into a recession.”

According to the Reuters poll, there is a 1/4 chance of a recession in the United States in the coming year, with the odds increasing to 40% in the next 24 months.

Euro

• Macron’s first-round victory provides some relief to the euro
• The euro gains some relief from Macron’s election victory
• EUR/USD is up 0.3 percent on the day, currently trading around 1.0910. While the dollar is slightly firmer overall, the euro is benefiting from the results of the first round of the French election yesterday.
• Macron has a decent lead, but the runoff on April 24 may be a close one between himself and Le Pen, as voters for Mélenchon will be split between the two and also abstaining from voting in general.
• For the time being, however, the euro is seeing some relief in European morning trade, regaining some ground after the opening gap higher earlier in the day was erased amid a firmer dollar. It would be more convincing if the euro could break above the recent highs of 1.0938-40.

Ireland

Ireland says it is working on an oil embargo against Russia as part of the next EU sanctions package; Germany is expected to be a stumbling block.

This comes as no surprise given the recent move to ban Russian coal. Coal may not make a significant dent in Russia’s economy, but it is a symbolic step by the EU toward acting on Russian energy.

The biggest impediment remains Germany, which is also Europe’s largest economy, because it relies heavily on Russian oil and gas to power its economy.

Equities

Eurostoxx -0.5%, DAX -0.8%, CAC 40 -0.1%, FTSE -0.3% & IBEX -0.3%.

US futures are also trending lower, with the S&P 500 down 0.6 percent at the moment.

After a sluggish start to the week, equities are off to a sluggish start this week.

This comes as the bond market rout continues, while concerns about global growth persist.