The global exit from quantitative easing is set to accelerate as central banks prepare to reverse the massive bond-buying measures taken during the new crown epidemic, which may cause new shocks to the world economy and financial markets. G7 central banks are expected to shrink their balance sheets by about $410 billion this year, according to estimates by Bloomberg Economics. That's a marked shift from last year, when their balance sheets grew by about $2.8 trillion, bringing their combined balance sheet expansion since the onset of the coronavirus by more than $8 trillion. This wave of quantitative easing has helped support the economy and asset prices during the pandemic. With inflation soaring to multi-decade highs, central banks are now starting to unwind, albeit belatedly by some critics. The combined impact of a shrinking balance sheet and rising interest rates is adding to the unprecedented challenge facing the global economy, which has already been hit by Russia's invasion of Ukraine and China's strict containment measures. Unlike the previous tightening cycle in which the Federal Reserve shrank its balance sheet alone, this time, central banks in other countries are also expected to follow suit.

Markets are pricing in a 50 basis point rate hike at the Fed's May meeting (Wednesday) since Fed Chairman Jerome Powell made it clear that he was discussing it. Now the latest wage data is already prompting market expectations for a further 75bps rate hike in June. Given the early signs that U.S. inflation is peaking, we think it's premature to expect that. Instead, we think Powell will steer clear of precise guidance on the size of future rate hikes after the Fed hiked rates by 0.5 percentage points in May and laid out a detailed plan to shrink its balance sheet (which will begin soon) as policymakers assess how the balance sheet reduction will be affect the economy in the coming months. The latest consumer spending report showed a modest deceleration in core personal consumption expenditures (PCE) inflation and an acceleration in service sector spending at the end of the quarter, which will release some pressure on commodity prices. Still, a tighter job market means the Fed continues to see upside risks to the price outlook. The April nonfarm payrolls report (Friday) is likely to show the unemployment rate hitting a pre-pandemic low of 3.5%. Employment growth continued to be strong, mainly in leisure and hospitality, as demand for consumer services increased rapidly.

One of Wall Street's most outspoken bears believes there's still plenty of room to fall in U.S. stocks. “We think the S&P 500 will dip as low as 3,800 in the near term, and possibly as low as 3,460,” Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, wrote in a note to clients. Their gloomy forecast means the U.S. benchmark could fall another 8% to 16% from Friday's close on the back of rising costs and the risk of a recession. April was the worst month for U.S. stocks in more than two years, as worries about an economic slowdown, stubbornly high inflation and increasingly aggressive tightening rhetoric from the Federal Reserve weighed on risk appetite. Adjusted for inflation, the sell-off means U.S. stocks have returned deep negative returns over the past few months. "Anyone who claims we're in a bull market has a lot to explain," Wilson added in the report. "The S&P 500 is already at its most negative real yield since the 1950s."

A gauge of U.S. manufacturing activity unexpectedly fell to its lowest level since 2020 in April, as growth in orders, production and employment slowed. The Institute for Supply Management data released on Monday showed that the index of manufacturing activity fell to 55.4 in April from 57.1. Numbers above 50 represent expansion. The median forecast of economists polled by Bloomberg was 57.6; all but one forecast was higher than the final result. The latest data showed signs of softening demand for commodities. New orders and production metrics both fell to their lowest levels since May 2020, although they remained above the thresholds that represent growth. The supplier delivery indicator was one of the few in the report to rise in April, with longer lead times as factories remain plagued by shipping bottlenecks and delays. The delivery indicator rose to a five-month high as producers faced export delays due to China's coronavirus restrictions and the Russian-Ukrainian war. A measure of prices paid by manufacturers has retreated, but remains very high.

The U.S. Treasury Department will reduce long-term bond issuance for the third straight quarter this month, allowing it to better match government spending needs, most bond traders said. While this would be the longest stretch of tapering long-term bond issuance since 2014-2015, it could also be the last in a while as the Fed is set to cut tens of billions of dollars a month in U.S. holdings by the end of the year Treasury bonds, and a shrinking Fed balance sheet will force the Treasury Department to increase its issuance over time. On Wednesday, the Treasury Department will unveil its so-called quarterly refinancing plan for long-term bonds, and typically any changes to its overall bond issuance strategy. How bond investment managers respond will be closely watched later in the day when the Federal Reserve will unveil plans to shrink its balance sheet.

The sudden 8% slump in Sweden's stock market and sparked a flash crash across Europe was driven by Citigroup's London-based trading desk. The slump was triggered by a large erroneous trade at Citi's London trading unit, said the people, who asked not to be named when discussing non-public information. A five-minute knee-jerk sell-off on the OMX Stockholm 30 hit a group of exchanges from Paris to Warsaw, sending major European indexes down as much as 3 percent and a loss of 300 billion euros in market value. A Citi representative declined to comment. While it’s unclear what caused the short-term plunge, a spokesman for Nasdaq Stockholm said it wasn’t because of a technical glitch at the exchange. "Our first priority is to rule out a technical problem with the system, and the second is to rule out an external attack on the system. We have now ruled out both," spokesman David Augustsson said.

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