Major US stock market indices such as DOW Jones, NASDAQ and S&P 500 closed Tuesday with new gains. Even though the Fed's hawkish rhetoric is increasing and the regulator itself has already raised its key rate by 0.25%, the stock market will now experience an inexplicable burst of optimism. From our point of view, this is a temporary phenomenon, because this increase is completely illogical in the current environment. Moreover, the rise in stock indices over the last six days is almost a record high in terms of strength in recent months and years. Therefore, we consider the current increase to be a retracement.
There was little news at the start of the current trading week. Jerome Powell, as already mentioned, conceded that the key rate could be raised by 0.5% several times this year. There were no other important events or announcements. At the same time, experts at Goldman Sachs said that the Fed would raise rates by 0.5% at the May and June meetings. In other words, this will take place at the next two monetary committee meetings. In light of this news, perhaps the current rise in risky assets is a run-up before a new fall. This phenomenon sometimes happens in markets when there is first an illogical move in one direction and then a stronger move in the other. Goldman Sachs believes that the Fed will push the rate to 3-3.25% in 2023. One of the most prominent hawks at the Fed, James Bullard, said yesterday that the rate should be raised as quickly as possible to stop upward pressure on inflation. Bullard said that the key rate should be brought to a neutral level as soon as possible so as not to encourage inflation to rise further. According to him, it can be assumed that inflation will not slow down seriously until the rate crosses the neutral level of 2.4%. As we have said before, the fight against inflation could drag on for several years. It is not a quick fix.
The conflict between Ukraine and Russia could also drag on for several years. Although the advance of Russian troops has stalled over the past two weeks, a growing number of military experts and political analysts say Belarusian troops are ready to invade Ukraine and try to take control of roads in western Ukraine in order to eliminate the military weapons that Western countries are supplying to Kiev. Poland, which offers NATO to introduce peacekeeping forces to Ukraine, actively supplies weapons and is ready to hand over its air defence systems, could also come under attack. Official Moscow has already stated openly that it may launch a preemptive strike on some Polish cities if Warsaw continues to actively help Ukraine and involve NATO forces in the conflict. From our point of view, this situation can be described as "brisk movement towards World War III" and not in any way "de-escalation of military conflict".