How aggressive will the US central bank be to tame inflation?

By: Miguel A. Rodriguez

12:11, 03 May 2022

The ISM index of US manufacturing activity fell to 55.4 last month from 57.1 in March, the lowest since an equivalent reading in September 2020

The Institute for Supply Management (ISM) Survey Committee Chairman Timothy Fiore said that overseas COVID outbreaks, specifically in China, created a short-term drag on U.S. manufacturing activity. Because of it, the difficulties in its delivery capacity may continue into the summer months.


Due to public holidays in China and the UK, where economic figures were few and far between, the leading indicator for US manufacturing activity was the focus of market attention. 


The current week is very important, with the Federal Reserve meeting on Wednesday to decide on a 50-bps hike in interest rates. This could be the main factor that could drive the market in the coming days and weeks. The focus will be on finding out to what extent the Fed will maintain its aggressive tone. The 50-bps hike can almost be taken for granted. However, one question is whether the Fed will announce a drastic reduction of its balance sheet with direct bond sales and what Powell's speech will be at the press conference after the meeting. Economic growth will inevitably be reduced by China's supply problems, as stated by those responsible for ISM, and by the uncertainty about the future development of the war in Ukraine. The other question is whether the Federal Reserve is going to take these circumstances into account for its monetary policy decision by taking its foot off the accelerator or it will proceed with the aggressive rate hikes that the market has already anticipated, even at the cost of causing a deep slowdown and even a recession.


The uncertainty is, therefore, very high. Yesterday, the treasury bond yields reached the maximum level. The 10-year bond yield was at the level of 3%, a reading unseen since December 2018.


The earnings that North American companies are publishing continue to be positive for the most part. Today those of the pharmaceutical company Pfizer are released, but the concern about interest rates continues to have more weight on investor sentiment.


As a result, the US stock indices had a roller-coaster day, with continuous ups and downs, ending the session positively.


The Nasdaq rose 1.30% yesterday but is still in a downtrend. From a technical analysis point of view, it needs to break above the 13,500 points level to be over in the short term.

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Sources: Bloomberg, Reuters

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