No Jumbo

A big week of earnings for energy firms, travel companies, and more. But central banks stole the show, with the Fed and the Bank of England both raising interest rates this week. And while the Fed delivered the biggest interest rate increase in over two decades, it played down the prospect of “jumbo rate hikes” in the coming months – and investors let out a huge (yet temporary) sigh of relief.

Macro

Let’s start with what’s arguably the biggest news of the week. The Fed raised interest rates by 0.5% on Wednesday – the biggest hike since 2000 – and said it would keep increasing at that pace over the next couple of meetings, unleashing its most aggressive rate hiking campaign in decades. It’ll also start reducing some of its $9 trillion worth of bond holdings next month. Jerome Powell, the Fed’s chairman, shot down speculation that the US central bank was weighing even larger rate hikes of 0.75% in the months ahead. That came as a major relief to investors, who sent stocks higher after Powell’s comments. But that proved to be temporary, with stocks collapsing on Thursday as investors digested the dark reality of stagflation.

The Bank of England raised its interest rate on Thursday from 0.75% to 1% – its highest level since early 2009. It also warned that the UK economy will slide into recession later this year as higher energy prices push inflation above 10% and squeeze household finances. The dire forecast pushed the pound to a two-year low against the dollar.

In another major market event this week, the 10-year Treasury yield hit 3% for the first time in more than three years – double its level at the start of the year. And according to a survey done by Bloomberg with more than 800 respondents, two-thirds of them reckon the 10-year Treasury yield will peak at some level between 3.15% and 4.10%. That has important implications for the economy: Treasury yields affect what Americans pay for mortgages and many other loans, feed into borrowing costs for companies, change the appeal of riskier investments, and more.

Part of the reason why Treasury yields are expected to climb higher is that the Fed will start to shrink its balance sheet next month, after a pandemic bond-buying blitz (quantitative easing) swings into reverse (quantitative tightening). The Fed will achieve this by letting its holdings of government bonds and mortgage-backed securities mature, rather than actively selling the assets it bought. But Fed policy makers have left open the possibility of selling assets at a later stage.

What’s more, unlike previous tightening cycles when the Fed was alone in shrinking its balance sheet, this time other central banks are expected to do the same. The Bank of England has already started to shrink its balance sheet by ending bond reinvestments in February, and the European Central Bank has signaled it will end QE in the third quarter. Meanwhile, the Bank of Canada’s passive roll-off of its balance sheet – that is, opting not to buy new bonds when the ones it owns mature – is expected to see its holdings of government debt shrink by 40% over the next two years.

Why does all this matter? In short: coordinated quantitative tightening by major central banks will send borrowing costs higher everywhere, dry up global liquidity, and potentially introduce another shock to the world’s economies and financial markets.

Stocks

Big Oil is swimming in a massive pool of profit, but governments aren’t exactly pleased. British oil giant BP reported bumper profits on Tuesday, scoring its high quarterly earnings in more than a decade. That came a few days after Chevron announced its profit more than quadrupled last quarter compared to a year ago, hitting its highest since 2012. Exxon Mobil, meanwhile, saw its profit last quarter double – and that’s even after writing down $3.4 billion from the value of its Russian business. Shell capped things off on Thursday, reporting its highest ever quarterly profits.

Those soaring profits naturally lead to soaring free cash flow, and oil firms are choosing to funnel that cash to shareholders through dividends and share buybacks. BP boosted its share buyback program by $2.5 billion this week, days after TotalEnergies pledged to buy back $2 billion worth of its own stock by July. Not wanting to be outdone, Exxon tripled its share buyback program to a whopping $30 billion. Big Oil investors are loving it, but governments aren’t keen: they’re pressuring energy companies to invest the money into oil production instead, as consumers feel the pinch of surging gas prices at the pump.

In other news, vacation rental marketplace Airbnb reported first-quarter sales and gave a forecast for revenue in the current quarter that both topped analysts’ estimates. The company sees “substantial demand” for travel heading into the busy summer season, after more than two years of Covid restrictions. That’s the same message investors got from peers Expedia and Booking Holdings, both who’ve said they expect this summer to be one of the best the industry has ever seen.

In fact, looking at clues across the entire value chain suggests the travel industry is rebounding strongly, especially in the US. Consider these three stats:

1. Air traveler volume is almost back to 2019 levels.
2. In March, US hotel profit per available room reached its highest level since 2019.
3. Amex saw travel spend more than double last quarter, while Mastercard said cross-border travel beat 2019 levels for the first time since the pandemic.

In summary, travel companies are currently witnessing a slow-and-steady climb in activity. But there’s alway the risk of a new Covid variant popping up and derailing the industry once again…

Crypto

Coinbase’s CEO, Brian Armstrong, made a bold prediction at a conference on Monday: 1 billion people will have used or tried crypto within a decade, up from about 200 million currently. He also sees a substantial portion of GDP happening in the crypto economy within 10 to 20 years. One thing supporting that trend is the growth of DeFi (decentralized finance), which allows people to trade, lend, and borrow tokens directly without intermediaries like banks.

Something interesting about Armstrong’s 1 billion prediction is that it brings back memories of a prediction Peter Theil made back in 1999. Thiel is a billionaire entrepreneur and venture capitalist that co-founded PayPal, Palantir, and a few other firms. Back in 1999, he predicted 1 billion people will have cell phones connected to the internet in 5 years. He was right – but it took 10 years instead of 5…

In other news, just weeks after Coinbase launched its long-awaited social NFT marketplace, crypto exchange Kraken announced on Tuesday that the waitlist is now live for its upcoming NFT marketplace: Kraken NFT. The platform is boasting zero gas fees for NFT sales and transfers, a built-in rarity assessment tool, cash or crypto payments, and support for Ethereum and Solana NFTs on launch. But one feature missing from the announcement is allowing Kraken NFT users to borrow funds against high-value NFTs as collateral – something Kraken’s CEO teased back in December.

Next week

Inflation data will be the key focus next week with April figures due from both the US and China. Appearances by a few Fed members will also be much anticipated after the Fed’s recent rate hike, with investors looking for more clues on how the US central bank plans to tame inflation while avoiding a recession. US consumer sentiment data is due next week too, which will offer some clues on how the American consumer is feeling in the face of stagflation. China, meanwhile, releases a series of data including trade data against the backdrop of lingering Covid lockdowns and disruptions. The UK's March GDP data and eurozone industrial production figures are also lined up in the week ahead.