Disrupted markets learn to live without the sympathy of the world

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By Katie Greifeld and Vildana Hajric

(Bloomberg) —

Stressed stock and bond markets are finding it much harder to get anyone’s attention with threats as big as war and soaring food prices catching the world’s attention.

Once feared as vigilantes whose every twist caused policymakers to rethink their course, markets are finding their tantrums garner little attention from governments bent on punishing Russia and reeling from inflation the highest in 40 years.

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While most people agree that is how it should be, given the severity of the threats, it opens the door to increasingly abrupt dislocations as solutions on both fronts prove elusive. At the end of 2018, it took about three weeks of severe unrest to force Federal Reserve chief Jerome Powell to bow to the market message. No such sympathy is currently showing – even with the S&P 500 stuck in correction territory days before central bank rates take off.

It’s a very different backdrop to the past. In four major tightening cycles since 1990, none have begun to come close to a decline this close to 10% in stocks.

“The inflation they are trying to control is not the typical inflation of a business cycle. This is an extraordinary circumstance,” says Art Hogan, chief market strategist at National Securities. “That’s why everyone is saying the Fed’s put is behind us.”

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Stock buyers hoping for mercy have another uncomfortable fact to consider. While investors can spy turmoil in the economy in the months and even years to come, there isn’t currently, at least in terms of slowing growth. While Goldman Sachs sees the risk of a recession as high as 35% in the coming year, economists polled by Bloomberg say the US economy will grow 3.6%.

That’s enough cover for Powell, who has repeatedly said the economy is growing enough to withstand the interest rates needed to contain inflation. In February, consumer prices in the United States rose 7.9% from a year ago, the biggest jump since the early 1980s, Labor Department data showed Thursday.

Stocks shook in the aftermath as Treasury yields rose. The S&P 500 ended the week down nearly 3%, despite posting its biggest rally in nearly two years on Wednesday.

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While February’s inflationary surge was the biggest since 1981, the numbers have yet to reflect the 14% rise in oil and other commodity prices so far in March. As the United States and other countries impose sanctions on Russia for its invasion of Ukraine, 12-month inflation figures are expected to remain “very uncomfortably high”, according to Treasury Secretary Janet Yellen.

In Ukraine, “what we’re seeing is an atrocity,” Yellen said in an interview with CNBC on Thursday. “We designed these sanctions to have the maximum impact on Russia while mitigating the fallout for everyone, including the United States. But it is unrealistic to think that we can take action like this. scale without feeling the consequences ourselves.”

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Along with rising energy and food prices, investments in US assets are also facing a backlash. While energy stocks have soared in line with oil prices, every other S&P 500 sector is suffering losses this year, sending the benchmark index down more than 12% from its all-time highs. Tech stocks – at the mercy of soaring Treasury yields – were the hardest hit, with the Nasdaq 100 falling nearly 20% from its peak.

Even the corporate bond market, which had held up relatively well to the upheavals, is starting to show some tension. Yields on BBB-rated bonds – the lowest rung of investment grade – widened to around 1.69 percentage points above Treasuries, reflecting the stress.

This put the BBB spread precipitously close to 2 percentage points. Crossing that threshold prompted the Fed to cut rates, hold them at zero, or suspend a data-raising campaign dating back to 2000, according to DataTrek Research co-founder Nick Colas.

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“There is a clear call and response between BBB spreads and monetary policy, and this slice of the U.S. investment-grade corporate bond market is starting to send red flags to the FOMC,” Colas wrote in a statement. report this week. “It’s too early to say that Chairman Powell and the FOMC are about to do another monetary policy flip-flop, like in January 2019, but that time could be coming very soon.”

However, there does not appear to be any urgency among policymakers to reverse their tightening plans. Powell told lawmakers last week he supported a quarter-point hike at next week’s meeting, while leaving open the possibility of a half-point hike down the road.

Depending on the duration of Russia’s war in Ukraine and the degree of tightening of financial conditions, this position could change in the weeks and months to come. Still, given the robust labor market recovery and soaring inflation, policymakers “must act” to satisfy the central bank’s dual mandate, according to Keith Lerner of Truist Advisory Services.

“The best they can probably do at this point is not be so aggressive,” said Lerner, the company’s co-chief investment officer and chief market strategist. “They’re not moving as fast, it’s not the same as in the past, when they could come in and cut rates and cut rates and just provide a lot of liquidity, because they’re constrained by the environment of inflation.”

©2022 Bloomberg LP

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