#Panic mode full#

The euro going to parity with the dollar is now possible in 2022, should the fighting drag on for months to come.ĮUR-USD vs.

The more this drags on, the worse it is for the euro, and the more pressure the conflict puts on the dollar with interest rate differentials increasing in favor of the greenback. The Ukrainians certainly expect the situation to get uglier in Donbass soon. I did not think it would last two months. I am mentioning this since the longer the conflict drags on, the bigger the effect it has on financial markets. We still do not know how much territory the Russians aim to “liberate,” from their perspective.Īssessed Control Of Terrain In Ukraine And Main Russian Maneuver Axes As Of April 9, 2022, 3:00 PM EST (Institute for the Study of War and AEI's Critical Threats Project) Having lost more soldiers in the past six weeks in Ukraine than in the nine years in Afghanistan, Russian leaders decided to cut their losses in the north (blue areas on the map, below) and concentrate on the Donbass region (primarily Luhansk and Donetsk). Please read important disclosures at the end of this commentary. Graphs are for illustrative and discussion purposes only. US Inflation Rate, US Fed Funds Rate (Trading Economics) I doubt the Fed can raise the Fed funds rate to over 2% this year, but they sure think they can do it. How many times will they do this in 2022? In theory, the more financial leverage there is in the system, the lower the number of rate hikes required to slow the economy down. The next FOMC meeting (May 3-4) should be a momentous event, as we will likely see a 50 bp hike as well as the QT schedule announcement.

#Panic mode full#

I don’t believe we will see it this year, but stranger things have happened if the Fed wants to go full throttle on quantitative tightening, to the tune of $95 billion per month. The question is - what can the Fed do about an inflation that turned out to not be “transitory,” as the Fed chairman insisted for most of last year? Treasury yields are flirting with a 40-year downtrend, and rising above 3.25% would mark that spot - as rates have never before (in the past 40 years) risen past the high of a prior tightening cycle. World food prices just hit an all-time high, and they may be headed higher over the summer. In the spring of 2022, war is raging in Ukraine, which is highly inflationary for food costs and all kinds of other commodities due to sanctions and the inability for supply chains to normalize after COVID. That means there is a whole generation of investment professionals who have never operated in a rising long-term interest rate environment. Please read important disclosures at the end of this commentary.Īs the chart shows (above), rates have been on a long-term decline since 1981. US 10-Year Govt Bond, US Fed Funds Rate (Trading Economics) For comparison purposes, in the last Fed tightening cycle in 2018, the 10-year note peaked at 3.25%. Treasury yields have nearly doubled since the Omicron panic in late November, touching 2.73% on Friday. Having realized that they are hopelessly behind the curve on inflation, the Fed has decided to go from super-easy money to quickly tightening monetary policy, which is causing a spike in Treasury yields that looks dangerous to me.