Get our take on how Monday's events could drive asset prices for the rest of this week.    Last week was all about central banks, guess what, this week central banks are once again taking centre stage. This time the sole focus was on Fed chair Jerome Powell, who was speaking at the National Association of Business Economics on Monday and said that the US central bank was prepared to raise interest rates in half percentage point increments to deliberately slow down the economy and weaken inflation, if it became necessary to do so. This caused stocks to come under pressure and US sovereign bond yields to surge. After last week’s stellar rally for US stocks, which had their best week since 2020, today’s remarks from Fed chair Powell triggered a sell-off in US stocks, the S&P 500 slipped 0.04% and the Nasdaq fell 0.4%. Monday’s movement in stocks was a keen reminder that high commodity prices, rampant global inflation, a war in Eastern Europe and a hawkish Fed are not a good backdrop for equity market bulls, thus rallies may not be built to last. Below, we take a look at three factors that could drive markets this week.   1, The US Treasury market and the yield curve  The US Treasury market is having its worst month since the election of Donald Trump in 2016, and the benchmark 10-year yield has surged nearly 50 basis points so far in March as the Fed sticks to its hawkish guns in the wake of the war in Ukraine. After touting the prospect of single 50 basis point hikes on Monday, Jerome Powell has caused yet another reassessment of where interest rates will go in the US in the coming weeks. The market is now expecting a 50-basis point hike from the Fed at its next meeting in May, according to the CME Fedwatch tool there is now a greater than 60% probability that US rates will rise to 75-100 basis points on May 4th, up from 25-50 basis points today. The sharp rise in Treasury yields has caused the US yield curve to flatten sharply, as you can see in the chart below. The 2-10-year Treasury yield curve is at its flattest level since 2019, when the Fed was last considering tightening rates before the pandemic. If the yield curve inverts, this typically signals a recession is coming for the US economy. Thus, we could see more US yield curve inversion in the coming days and weeks, especially after Fed chair Powell’s speech on Monday, which touted the possibility of  more aggressive interest rate moves to tame inflation.  However, an inverted US yield curve can have a strange impact on the stock market. When the yield curve starts to flatten, this is when the bulk of a sell-off in stocks can happen, for example, the Nasdaq has fallen 14% since reaching a record high in November 2019. This has coincided with the period when the US yield curve started to flatten, as you can see below. Thus, the bulk of the selloff may have already happened for US stocks and it is worth noting that an inversion of the yield curve (when short-dated US Treasury yields rise above longer-dated yields), could be good news for tech stocks and the Nasdaq. This is because some of the younger, super-growth tech companies rely on longer dated bond yields to discount their future cash flows. When longer-dated yields are falling, this pushes up their future cash flows, which can attract buying interest for their shares. Thus, we will be watching the Nasdaq extremely closely in the coming days and weeks, to see if this index starts to make a bottom at the same time as the US yield curve finally inverts.  Chart 1: US 2-10 yield curve (St Louis Fed)   2, Commodities  The price action in commodity markets on Monday was another indicator that the risk premium for commodity prices has not yet been eradicated, and short, sharp spikes higher in commodity prices are to be expected. The price of brent crude surged by nearly 8% on Monday to $116 per barrel, after Russia and Ukraine’s latest round of peace talks stalled and the battles in Ukraine appeared to intensify. There was another factor also driving up oil prices at the start of this week, the lockdown in Shenzhen, a key industrial and technology hub in China, eased covid lockdowns and partially reopened at the end of last week, which has reduced fears that prolonged Chinese lockdowns could weigh on global growth and thus commodity demand. The EU is also considering joining the US and the UK in an embargo on Russian oil and the IEA have not helped matters by stoking more fears about tight supply and calling for emergency measures to reduce...

(Business travel prevents my weekly discussion of the price action.  It will return next week, but a macro discussion is offered below).  Economists and policymakers generally recognize that growth will be weaker than was anticipated at the end of last year. Price pressures are going to be stronger and last longer than previously projected. The supply shock has been exacerbated by Russia's invasion of Ukraine and the social restrictions in China stemming from Covid.   With the major central bank meetings past, the highlight in the week ahead will be the flash PMI readings. The risks are on the downside.   And if those risks do not materialize, many will assume they will later. At the same time, major and many emerging market central banks feel compelled to continue the tightening cycles. The Swiss National Bank and the Bank of Japan are notable exceptions. So is the People's Bank of China, which is more likely to ease policy than tighten.   While a recession has been a risk scenario, we worry that the odds are increasing, and it could become the base case. Fiscal policy is tightening. Monetary policy is tightening. The rise in energy and food prices acts as a large tax on consumption. It weakens discretionary spending. Russia's invasion of Ukraine exacerbates many of the economic headwinds that were already bedeviling policymakers. Some see more dangerous implications. In particular, the freezing of Russian reserves and banning trading with the central bank may hasten the dollar's demise, warn the doomsayers. Ironically, many share the perspective of Beijing and Moscow that the West is in decline. It is an old refrain. Oswald Spengler's book with that title was published in 1926.   Indeed, many times over the past quarter of a century or so, some observers argue that the dollar's role as the numeraire-the main reserve asset, invoicing currency, and benchmark for most commodities will end. Purported successors have included the Japanese yen, the euro, the Chinese yuan, and even crypto. The argument now is that the sanctions imposed on Russia, and especially the Russian central bank, will expedite the shift away from the dollar. It sounds reasonable, and I, too, have expressed fears in the past about the implications of the broad sanction regime.   However, the critical issue that I identified in my 2009 book Making Sense of the Dollar remains largely unaddressed. There is no compelling alternative. Europe has shown itself to be as willing to sanction Russia's central bank as America. That would seem to preclude the euro, even though the Sino-Russian multi-year energy deal announced before the war will be settled in euros, and Russia's central bank boosted its euros reserves as it shifted out of dollars.   Even with some common bonds, the European bond market remains fragmented, yields are low.   Its breadth and depth are nothing like the US Treasury market. To move out of the dollar and US Treasury market is to give up yield, liquidity, and security. We already live in a multiple reserve currency regime. The most authoritative source of central bank reserve holdings is the IMF. Despite the handwringing and chin-wagging, as of the end of Q3 2021, foreign central banks held more dollars than ever before (~$7.08 trillion). Of those holdings, nearly half ($3.43 trillion, as of early March) are held in custody at the Federal Reserve.  After the dollar's 59.15% share of allocated reserves, the euro is a distant second at 20.48%. It is smaller than the sum of its parts. I mean that the only legacy currencies, like the German mark, French franc, Belgian franc, etc., together accounted for a greater share of global reserves than the euro does now. The yen is the third most used reserve currency, with an almost 5.85% share. Reserves themselves are highly concentrated. The top 10 holders accounted for more than 62% of reserves. Nearly 30% of the central banks' reserves are accounted for by China and Hong Kong. The Chinese yuan cannot really be a reserve asset for the PBOC or Hong Kong. And when everything has been said and done, the Hong Kong dollar remains pegged to the US dollar. The Hong Kong Monetary Authority hiked rates 25 bp within hours of the Fed's move.  Before Bretton Woods collapsed, a Yale economist, Robert Triffin, warned of its coming demise. The essence of the argument was that there was a contradiction at the heart of the practice of using a national currency as the dominant reserve asset. To be used as a reserve asset, the supply of the currency must increase in line with the demand for reserves. Yet as the supply increases, its credibility preserving its value decreases. I purposely turned Triffin on his head and suggested it was precisely that the role of the euro and yen would be limited because of their current account surpluses and the lack of deep and liquid bond markets. Yet, the...

EUR/USD - 1.1047 Euro's strong retreat from last Friday's 12-day high at 1.1137 to as low as 1.1004 in New York signals corrective upmove from March's fresh 22-month bottom at 1.0807 has possibly made a temporary top there and consolidation with downside bias remains, below 1.1004 would yield further weakness towards 1.0972 but 1.0951 should remain intact. On the upside, only a daily close above 1.1094 would dampen bearishness and risk stronger gain to 1.1118/20, break, 1.1137 again. Data to be released next week : New Zealand exports, trade balance, imports, Japan Market Holiday. U.K. Rightmove house price, Germany producer prices. U.S. national activity on Monday.

Outlook: We are struck dumb by the Fed delivering anti-inflationary policy and guidance, but markets are not sure it’s credible and the yield curve is flattening. See the chart. At the same time, the ECB is wibbly-wobbly and may not get to a hike this year at all, and yet the euro is hanging on to gains. What happened to interest rate differentials influencing if not determining exchange rates? The “dovish” hike in the UK is understandable and after a dead-cat bounce, so is the pending fall in sterling, but it “should” get some support vs. the euro. Note the US has something in its corner—the robust and materialistic consumer. Yesterday the latest revision by the Atlanta Fed of Q1 GDP is 1.3%, up from 1.2% on March 16. This time to the consumer we can add less negative real gross private domestic investment growth, -4.2% from -4.9%. Now we wait for another one next Thursday.  Note that our canary in the coal mine, the Australian dollar, is also signaling good global growth. Talk of recession is just wrong, or at least premature.  If the usual metrics of economic growth and relative rate differentials, including real ones, are not having their usual influence, the drivers in FX must be change in risk sentiment on every passing breeze. This makes for an unstable and unpredictable market. We see forecasts of the euro rising back up over 1.1200, for example, apparently on chart interpretations. We can see that possibility, too, but can’t accept a long position in a currency whose issuing countries are at war, whether they admit it or not. Not only at war, but about to get rescued for the third time by the US. The other party up in arms about this overly relaxed attitude is Goldman Sachs, which complains about current prices no longer reflecting more negative scenarios, according to Bloomberg. This raises the vulnerability of asset prices to crashes if and when bad news comes along. In other words, markets are accepting bad news too calmly ahead of worse news. “Europe’s benchmark Stoxx Europe 600 index is close to erasing all of the losses sustained since Russia’s invasion of Ukraine on Feb. 24, while the S&P 500 is now trading higher than where it closed on the eve of the attack. European stocks have all but erased the losses incurred since the start of the war.” This is nuts. “Under Goldman’s downside scenario, a severe disruption in gas flows from Russia could shave off 2.5 percentage points from European gross domestic product and 0.25 points from U.S. economic output this year. According to the strategists, a deterioration of the conflict could push the S&P 500 to 4,059 index points -- a drop of almost 8% from Thursday’s close. “Our downside case is no longer well reflected in many areas and it is now easier to identify potential hedges than it has been for several weeks,” the strategists said. Adjusting for options volatility, long oil positions stand out, while European assets now screen more favorably too as downside tail hedges, they said.” For example, the US warned Putin may threaten nuclear, but the Stoxx 600 opened little changed. “Barclays Plc strategist Emmanuel Cau agrees with Goldman. ‘More substantial progress may be needed for the risk-on move to persist. Even if a truce were to happen soon, it is unclear whether sanctions on Russia will be lifted immediately. So the negative impact on growth and higher inflation will still materialize. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!  

Market movers today US President Biden and China's President Xi Jinping will discuss Russia's war against Ukraine and 'other issues of mutual concern' via phone call. Markets will look out for hints that China is willing to take a more active role as a mediator in the Russia-Ukraine war. During an otherwise quiet day on the data front, headlines surrounding possible ceasefire negotiations between Ukraine and Russia will also remain in focus. Comments from Fed's Waller could reveal more about the pace of future policy tightening. The 60 second overview UK: Bank of England yesterday hiked its key policy rate 25bp to 0.75% as expected. However, it played down the possibility of more rate increases over the coming months as it sees 'risks on both sides'. Oil: Brent bounced back yesterday. We attribute it to the relatively dovish perception of Wednesday's FOMC meeting, which has also led to a drop in broad USD. We continue to see upside for oil prices over the coming 3M as the market tightens in search of oil beyond Russia. Russia: S&P cut Russia's credit rating to CC yesterday citing the risk Russia will not be able to make payment on its debt saying. It was S&P's understanding that investors did not receive coupon payment on a USD bond scheduled for Wednesday, triggering a 30-day grace period for Russia to avert default.  Japan: Bank of Japan kept monetary policy unchanged at its meeting overnight and further revised down its view on the economy due to impact of Covid and rising commodity prices. Equities: Global equities higher for the third day in a row with VIX index lower for the third day in a row as well. The first 2½ months of 2022 have been characterized by massive rotation between sectors and styles and with risk of investors being caught on the wrong foot. Looking forward we see uncertainty fading despite the terrible war in Ukraine continuing. With uncertainty fading, we see rotations in the coming months being much smaller and hence also volatility coming down. US stocks rose yesterday and ended the day with Dow +1.2%, S&P 500 +1.2%, Nasdaq +1.3% and Russell 2000 +1.7%. Asian markets are mostly higher this morning though with Hang Seng in small setback after two days of spectacular moves. Futures are lower in both US and Europe. FI: The war in Ukraine and the negative impact on the European economies relative to the high inflation is still the main focus on the markets after the Federal Reserve and Bank of England both raised policy rates on Wednesday and Thursday. Yesterday, bond yields initially fell before rising later in the day. We are seeing a normalisation of some of the "stretched" spreads such as the German ASW-spreads that are slowly normalising. However, the significant increase in German net borrowing requirement from EUR 99bn to EUR 200bn due to the increase in defence spending has had only modest impact on the German ASW-spreads. FX: Yesterday's rebound in commodities benefitted NZD, NOK and AUD but also EUR notably benefitted despite a recent inverse relationship to oil. EUR/USD temporarily moved above 1.11, EUR/SEK edged above 10.40 while EUR/NOK moved below 9.80. GBP weakened on Bank of England's rate announcement with EUR/GBP moving above 0.84. Credit: Indicies continued to tighten yesterday with iTraxx main some 3.1bp tighter and Xover 11.8bp tighter. These are now indicated at 70.3bp and 335.5bp respectively, marking a solid recovery from their widest levels during the war (at 89bp and 434bp). Yesterday we also saw positive signals from the primary markets, where Castellum from the otherwise badly bruised real-estate sector, managed to print an oversubscribed EUR benchmark bond.

Precious metals markets sold off ahead of this week’s Federal Reserve policy meeting. But after Fed officials announced their rate hike, prices recovered somewhat. Another market that has gone haywire is nickel. It’s not a metal that typically drives headlines, but prices swung so violently in futures markets that trading had to be halted for the first time in 24 years. Nickel prices doubled in matter of hours last week. An institutional trader had placed big bets that nickel prices would fall and was forced to cover, or buy back, his short positions. An epic short squeeze ensued, followed by a massive sell-off this week. Some precious metals analysts point to the potential for a similar short squeeze to play out in silver. The paper silver market is heavily shorted by leveraged institutional traders who have no intention or desire to deliver physical metal. In the event of a scramble for scarce supplies of silver, futures markets could become completely unhinged. In other news, the big question on investors’ minds is how the Federal Reserve’s newly launched rate hiking campaign will impact markets. On Wednesday, the Fed bumped up its benchmark interest rate by a quarter point, as expected. Both equity and precious metals markets responded positively.  Investors were relieved that central bankers didn’t opt for a larger hike. However, Jerome Powell and company promised additional hikes this year. Powell acknowledged that monetary policy has failed to keep inflation contained within target ranges. He admitted that policymakers got it wrong in forecasting only modest price level increases.  Yet he expressed confidence in the Fed’s current forecasts for inflation rates to fall.  PBS News Hour Report: The chair of the Federal Reserve, J. Powell acknowledged today that he and the wider Federal Reserve Board had underestimated the threat of inflation last year. But with the annual inflation rate now closing in on 8%, that attitude has changed and Powell committed to ramping up a fight against ever rising prices. Jerome Powell: We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation. The median inflation projection of FOMC participants is 4.3% this year and falls to 2.7% next year and 2.3% in 2024. This trajectory is notably higher than projected in December and participants continue to see risks as weighted to the upside. Powell’s outlook for inflation rates to come down but remain elevated above the Fed’s 2% target was widely interpreted as hawkish. The implication is that the Fed will find reason to keep tightening into next year. Others interpret the Fed’s inflation outlook as an admission that central bankers won’t have the will to bring inflation back below target.   They may hike rates a few times. They may try to curtail bond purchases. But they won’t take away the punch bowl completely.    And the moment the banking system, stock market, or bond market run into a crisis, the Fed will reverse course on tightening.  The recent spikes in energy and food prices threaten to bring about another kind of crisis. Although commodity prices fell sharply earlier this week, the risk of worsening supply chain disruptions and shortages still looms.  Precious metals markets certainly face scarcity issues. Relentlessly strong demand for physical bullion is straining mints and pressuring premiums higher.  The U.S. Mint announced this week that shortages of silver blanks for striking coins will force the cancellation of some planned products.  The Mint will no longer be producing replica Morgan and Peace Silver Dollars for 2022 – a big disappointment for fans of these historic coins. Minted from 1878 to 1935, these one-dollar silver coins now command significant semi-numismatic premiums in the collectible market based on their condition.  Silver half-dollars, quarters, and dimes minted up until 1964 carry lower premiums over spot – though recently premiums for these no longer minted coins have risen due to strong buying pressure.  Those who prefer the iconic Morgan silver dollar design and a full-ounce unit size may want to take a look at privately minted Morgan Silver Rounds.  The name Morgan refers to George T Morgan, who served as a U.S. Mint engraver during the late 1870s.  Morgan made the bold decision to move away from Greek style figures and use an American woman to symbolize liberty. A friend recommended Anna Willess Williams from Philadelphia as the model. He declared her profile to be the most perfect he had seen. Today’s Morgan silver rounds are an homage to the classic design of the historic one-dollar silver coins. The rounds are composed of 99.9% pure silver and are available through Money Metals Exchange at a significant discount compared to Silver Eagles especially and other government-minted coins. On the sound money policy front, we’re pleased to report some...