As terrible accounts emerged of the human price involved in the conflict in Ukraine, Western governments moved to increase sanctions.
The US Treasury blocked Russian debt payments of $650 million from US accounts, effectively freezing their Dollar assets. Russia made the payments in Rubles after these Dollar transfers were rejected, raising the spectre of a technical default as there is no provision for payment in another currency.
The conflict has intensified inflationary pressures which were already a major cause for concern and the Federal Reserve finally acted but with only a 25bp hike, presumably to avoid denting confidence further. However, it does look set that further hikes of 50bp are in the near term pipeline and, although recent Fed minutes were not as aggressive as some had expected, they are still on course to begin to shrink their $9 trillion balance sheet by $95 billion a month, with mortgage backed securities forming a substantial portion. The US Treasury curve bear flattened causing a temporary slight inversion, much to the delight of financial media commentators.
March Eurozone Area inflation printed at 7.5%, unsurprisingly energy costs providing the biggest boost. EU governments announced a series of short-term measures to combat this, such as fuel tax rebates and energy tax cuts, but these are only temporary and the move away from energy dependency on Russia will not help, despite being a slow process for the likes of Germany and Eastern Europe. The ECB has to deal with a collapse in EA confidence in March (although they voted to accelerate stimulus wind down) and they remain the central bank with the hardest path to navigate.
The Bank of England, our own ‘behind the curve’ central bank, delivered another 25bp hike rather than the 50bp some of the MPC voted for at the previous meeting (making it the first three back to back hikes since the Bank gained its independence). It is true that base rates have only marginal effects of on our spiralling costs of living but they can’t sit around doing nothing in the face of the kind of inflation prints we are getting accustomed to (CPI was just released at 7%). A tight labour market and growing inflation expectations leave them no option despite the economy losing some momentum.
Credit spreads found some stability and retraced a little of the years move but remain wider and coupled with some more worthwhile benchmark yields, there are decent overall yields now on offer. Primary markets reopened in March and while EUR and GBP (mainly in financials) were busy the USD primary market remains, by far the most active and some jumbos were priced from the likes of Goldman and Citi.
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