Chart 1: Index Performance in March
Equities have rebounded from the low in mid-March and posted a positive return during the month. Despite the positive return in March, the S&P500 and Nasdaq Composite Index were down 4.9% and 7.7% respectively in the first quarter of 2022, the biggest quarterly decline since the pandemic outbreak in 1Q 2020. Meanwhile, the FTSE World Government Bond Index decreased by 3.4% in March, as the concerns on surging inflationary pressure, the rate hike cycle led by the Federal Reserve, and the impact of Russia’s invasion of Ukraine weighed on both equities and fixed income.
The commodity continues to move higher as WTI Crude oil surged to US$123.70 per barrel before pulling back to US$100.38 per barrel. The pullback of crude oil in late March was due to optimism surrounding Russia/Ukraine settlement talks and the US government announcement on the Strategic Petroleum Reserve release. WTI Crude Oil was up 33% in the first quarter and volatility is likely to continue, driven by geopolitical development and supply disruption
US inflation is now at a 40-year high, at 7.9% with the surge in energy and commodity prices that could still lead to further inflationary pressure. In comparison, the median inflation projection among FOMC members is 4.3% in 2022 and the Federal Reserve expects inflation only to return to 2% over time.
Mid-March, the Federal Reserve (Fed) raised rates for the first time since 2018. The Fed expects to raise rates six more times in 2022 and hinted that the central bank could take a more aggressive move, including 50 basis points increases, if necessary to curb inflation.
The Fed also announced that it will start reducing its balance sheet in May. Its balance sheet has ballooned to nearly US$9 trillion after carrying out quantitative easing by purchasing government bonds and other assets in response to the economic shutdown caused by the COVID-19 pandemic in March 2020.