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Rising expectations of aggressive Fed move this week roil markets




© Reuters. FILE PHOTO: The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo


SINGAPORE/NEW YORK (Reuters) -Rising expectations that the Federal Reserve will raise benchmark interest rates by 75 basis points this week unsettled global investors Monday and fuelled steep declines in both U.S. stocks and bonds.

The Federal Reserve meets on Wednesday in the midst of heavy selling in stock and bond markets following May data showing U.S. consumer prices rising at their fastest pace since 1981. A 75 basis point hike would be the biggest since 1994.

CME’s FedWatch tool, based on the prices of short-term credit futures, shows a 30% chance of a 75 basis point rate hike at this month’s meeting, up from a 3.1% chance seen one week ago.

“The May inflation data was so concerning that we think the Fed will react even more aggressively in moving rates ‘expeditiously’,” BNY Mellon (NYSE:BK) strategist John Velis said on Monday. His note forecast a 75 basis point hike on June 15, up from an earlir 50 basis-point prediction.

“We felt compelled by circumstances to change our view.”

Barclays (LON:BARC) and Jefferies also forecast a 75 basis point hike for this week.

“US CPI surprised to the upside and continues to show broad and persistent price pressures,” Barclays analysts said in a Sunday note. “We think the Fed probably wants to surprise markets to re-establish its inflation fighting credentials.”

The S&P 500 appeared on track to confirm a bear market on Monday, while a widely watched part of the Treasury yield curve inverted on fears that big Fed hikes would tip the economy into recession. Yields of benchmark 10-year Treasuries, meanwhile, hit their highest levels since 2011. [.N]

“The markets are not waiting for Wednesday’s (Fed) meeting, they are going to front run them and that’s what is already happening in the markets today,” said Jim Paulsen, chief investment strategist at the Leuthold Group.

Other large investors on Wall Street said that while they do not see a 75 basis point move as imminent, the probability of such a large rate hike in the next few months are rising.

“Our baseline is that the Fed delivers 50 bps this week and will try to set up an option for 75 bps in July, but if the market prices in a higher risk of 75 bps over the next few days, we think this will give the Fed an opportunity to be more aggressive on Wednesday,” analysts at Pacific Investment Management Co (Pimco) wrote Monday. “We expect Chair Powell to use the press conference to signal larger hikes are back on the table and that they are not slowing down in September.”

Standard Chartered said in a Monday note that while it expected a half-point rise this week, it did not preclude larger increases of 75 basis points or even a full percentage point.

It upgraded its forecasts for July and September to a 50 basis point and a 25 basis point increase, respectively, from previous expectations of 25 basis points in July and zero in September.

Markets have reacted too, with a selloff in short-dated Treasuries along with futures tied to the Fed policy rate extending in Asia on Monday. Yields on the two-year Treasury note are at their highest since late 2007. [US/]

In one sign of turmoil in the global fixed income market, credit default swap indexes measuring the cost of insuring against European corporate bond defaults jumped on Monday to their highest since 2020. [L8N2Y01ID]

Bets on the U.S. terminal rate – where the Fed funds rate may peak this cycle – continue to rise. On Monday, rates were priced to approach 4% in mid-2023, up almost one percentage point since end-May. Deutsche Bank (ETR:DBKGn) said it now saw rates peaking at 4.125% in mid-2023. [L8N2Y01O7]

For Rabobank, the risk of ‘stagflation’ – a period of weak growth and high inflation last seen in the 1970s – could give way to the threat of ‘incession’, a combination of inflation and recession, it said in a research note on Sunday.


Oil Prices Fall amid Protests in China



Oil prices decline

Oil prices fell on Monday amid a general decline in investor appetite for risk amid information about the ongoing protests in China against vested restrictions.

The cost of January futures on Brent crude oil on London’s ICE Futures exchange was $81.31 per barrel on Monday, down $2.32 (2.77%) from the close of the previous session. At the close of trading on Friday, those contracts fell $1.71 per barrel to $83.63.

Oil prices decline – what’s going on in the market?

The price of WTI futures for January crude fell by $2.31 (3.03%) to $73.97 per barrel in electronic trading on the New York Mercantile Exchange (NYMEX). By closing of previous trades, the cost of these contracts decreased by $1.66 (2.1%) to $76.28 per barrel. Brent and WTI gained 4.6% and 4.8%, respectively, last week.

According to Bloomberg, protests were held in cities across the country, including the capital Beijing, as well as Shanghai, Xinjiang, and Wuhan, which was originally the epicenter of the COVID-19 spread.

That contributes to a stronger U.S. dollar, which reduces the attractiveness of investments in crude, and also raises the possibility of even more significant tightening of restrictions by Chinese authorities, the agency said.

“The outlook for the oil market remains unfavorable and the events of this weekend in China do not add to the positive,” notes Warren Patterson, who is in charge of commodities strategy at ING Groep NV in Singapore.

According to the forecast of analytical company Kpler, oil demand in China in the fourth quarter will decrease to 15.11 million barrels per day (bpd) compared to 15.82 million bpd a year earlier.

Earlier we reported that Russia will ban the sale of its oil to countries that have imposed a price ceiling.

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Oil Russia ban news: Russia will ban the sale of its oil to countries that have imposed a price ceiling



oil Russia ban

Will Russia sell oil to Europe? The administration of President Vladimir Putin is preparing an order prohibiting Russian companies and any trader from buying Russian oil to sell raw materials to countries and companies that have imposed a price ceiling on Moscow. Bloomberg news agency wrote this, citing a report from sources.

“The Kremlin is preparing a presidential decree banning Russian companies and any traders buying national oil from selling it to anyone who participates in the price ceiling,” the publication wrote.

According to the newspaper’s interlocutors, this would prohibit any mention of the price ceiling in contracts for Russian crude, as well as transferring it to countries that have joined the price ceiling for the natural resource.

In the first half of September, the press service of the US Treasury Department said that the USA, together with its allies from G7 (Great Britain, Germany, Italy, Canada, France and Japan) and the European Union (EU) would impose a ban on marine transportation of Russian oil on December 5 and oil products – on February 5.

Earlier we reported that EU negotiations on limiting the prices of Russian oil reached a deadlock today.

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EU talks on restrictions on Russian crude oil prices today stalled



russian crude oil price today

Negotiations between the European Union countries about the “ceiling” of Russian crude oil prices today reached an impasse; Bloomberg reported, according to its sources.

Representatives of the bloc cannot reach an agreement on the ceiling price of Russian oil. According to the agency, the proposed European Commission limit of $65-70 per barrel, Poland and the Baltic countries believe “too generous,” while Greece and Malta, which is actively engaged in transporting fuel, do not want the limit to fall below $ 70. Recall that the Russian response to the oil price cap was negative. The Russian government has officially said that it will only sell oil at market prices.

“We are looking for ways to make this solution work and we are trying to find a common ground to implement it in a perfectly pragmatic and efficient way, while avoiding that it may cause excessive inconvenience to the European Union,” said German Chancellor Olaf Scholz.

Earlier, we reported that the SEC fined Goldman Sachs $4 million for non-compliance with ESG fund principles.

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