Morning Bid: Full steam ahead for central banks

The Federal Reserve Building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo/File Photo

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A preview of the day ahead at the Sujata Rao markets.

As of Wednesday, the US Federal Reserve begins to allow the bonds it holds to mature and will no longer replace them – known as quantitative tightening (QT). Its goal is to allow $95 billion to flow off its balance sheet per month, but it will start June at a calmer monthly pace of $45 billion.

QT plans are well flagged though, when the world’s largest holder of Treasuries reduces its presence in the market, some nervousness is in order.

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The European Central Bank, meanwhile, will reduce its net asset purchases to 20 billion euros for June.

And the Bank of Canada will make its second straight 50 basis point interest rate hike. More such rate hikes are expected as policymakers focus squarely on inflation nearing 7%.

Their apprehension can be understood. Hopes that inflation has peaked are challenged by oil prices which have just enjoyed six consecutive months of increases. Markets could tighten further as the European Union begins to cut oil imports from Russia.

The impact of the oil surge was evident in Tuesday’s data showing a dent in US consumer confidence.

And Wednesday’s figures showed UK retailers raised prices at the fastest rate in more than a decade last month as food and energy costs fell. German retail sales plunged 5.4% (vs. 0.2% expected) in April as consumers felt the effects of higher prices read more .

Earlier, the data confirmed how China’s recent shutdowns have rumbled global supply chains, with manufacturing activity slowing across Asia.

With the shutdowns ending now – from Wednesday Shanghai citizens can leave their homes and drive their cars – it could give oil markets more momentum.

However, it is a new month. European markets are opening more firmly and Wall Street is forecasting a firmer start.

Treasury yields are up across the curve after May saw them post their first monthly decline since November.

BoJ, ECB, Fed, SNB and BoE balance sheets

Key developments that should further guide markets on Wednesday:

-ECB’s Lagarde, Villeroy de Galhau and PBOC’s Knot, Yi Gang speak at the BIS event

-Final PMIs

-Eurozone PPI/employment

-St. Louis Fed Chairman James Bullard speaks

-US 30-Year Mortgage Rate/ISM New Orders/JOLTS Job Postings

-US revenue: Gamestop, sprint

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Reporting by Sujata Rao; edited by

Our standards: The Thomson Reuters Trust Principles.

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