Overview: The pendulum of market expectations has
swung dramatically and now looks for 100 bp cut in the Fed funds target this
year. That seems extreme. At the same time, the dollar’s downside momentum has
stalled, suggesting that the dollar may recover some of the ground lost
recently as the interest rate leg was knocked out from beneath it. The euro
twice in the past two days pushed through $1.09 only to be turned away.
Similarly, sterling pushed above $1.23 but has failed to close above it. The
Dollar Index snapped back after dipping below 102.00 yesterday for the first
time since February 2. It ended a five-day drop. Follow-through dollar buying
has left the intraday momentum indicators stretched ahead of North American
open. Bank shares remain under
pressure

Overview:  The dollar remains under pressure
following the Federal Reserve’s rate hike. The market thinks it heard that the
Fed was done hiking, even though Fed Chair Powell held out the possibility that
"some additional firming may be necessary."  The Norwegian krone
is the strongest of the G10 currencies today, up more than 1%, spurred by a 25
bp hike and a commitment to do more. The Dollar Index briefly traded below
102.00 for the first time since February 3. A close below 102.35 today would be
the sixth decline in a row. The JP Morgan Emerging Market Currency Index is
edging higher and trying to extend its advance for the fourth consecutive
session.  Equities are mixed today.
Hong Kong rallied 2.3% and its index of mainland shares jumped nearly 3% but
most

Overview: The market has concluded that the Fed will
hike rates today. The US two-year yield has risen from about 3.63% at Monday’s
lows almost 4.20% yesterday. It needs to rise to 4.35% to recover half of its
decline since March 8 but has come back softer today. Meanwhile, the banking
crisis continues to ease, and Europe’s Stoxx 600 bank index is up 1.5%, its
third consecutive advance. The US KBW bank index rallied almost 5% yesterday. Still, while the dollar drew
support from the adjustment of Fed views yesterday, it is mostly softer today,
ostensibly on ideas that today’s hike could be the last in the Fed’s cycle. That
said, we suggest below that the median forecast by Fed officials will likely
see a terminal rate a little higher than it had in December.

Overview: The banking crisis is ebbing. The Bank of
England and European Central Bank assured investors that the AT1 bonds are
senior to equity claims, and Switzerland is a unique case. Bank share indices
in the Europe and the US rose yesterday, even though the shares of First
Republic Bank fell by 47% yesterday. The $123-stock at the end of last month
reached almost $11 yesterday. It is trading around $14.75 pre-market. Global equities are building on
yesterday’s recovery. The large markets in the Asia Pacific traded higher, led
by more than a 1% gain in Hong Kong and China’s CSI 300. Japan’s markets were
closed and may play catch-up tomorrow. Europe’s Stoxx 600 is up 1.35%. If
sustained, it would be the first back-to-back gain in two-and-a-half weeks. US
S&P

It was widely understood that the
Federal Reserve would raise rates until one of three things took place:
inflation was clearly on course to return to the target, the labor market would
weaken precipitously, or systemic stress threatened. At the same time, the
shocks we have had to cope with, Covid, supply chains, and Russia’s invasion of
Ukraine were commonly cited, and the. The re-pricing of assets as interest rates began
normalizing may have been under-appreciated. In addition, stress was seen in household debt
delinquency figures like auto loans. It was also recognized that banks had not
passed the higher interest rates to depositors and that money markets and T-bills
were attracting funds.

The weak link was discovered,
and it was again, like the Great

Overview: The support for First Republic Bank shown
by a consortium of US banks by shifting $30 bln of deposits is helping break
the financial anxiety that has gripped the market for more than a week. The
liquidity provisions for Credit Suisse by the Swiss National Bank also are
contributing to improved sentiment. The Fed’s balance sheet expanded sharply
last week as the bridge banks were extended credit to help the unwind of SVB
and Signature Bank. Discount window borrowings surged by a record as banks drew
on the more relaxed conditions, seemingly preferring the known facility and its
flexibility to the newly opened facility, the Bank Term Funding Program (BTFP).
Separately, after the close of China’s mainland markets, the PBOC announced a
0.25% cut in required

Overview: The pendulum of market psychology is
swinging dramatically. Amid the US banking crisis, Credit Suisse’s long-running
pressures percolated back to top-of-mind, sending ripples through the capital
markets, trigging a sharp slide in the euro. The SNB support is helping the
markets calm today. The odds of a 50 bp hike by the ECB today have been cut to
about 50% compared with a nearly 100% a week ago. The market has about a 66%
chance of a 25 bp hike by the Fed next week discounted and about a 50% chance
of a quarter-point move by the Bank of England priced into the overnight index
swaps.Asia Pacific equities continued
the rout, while European stocks have stabilized, including the bank index. US
equity futures are narrowly mixed. Benchmark 10-year bond

Overview: The capital markets remain unsettled. Asia-Pacific
bourses rose, but European markets are sharply lower, with the Stoxx 600 off
1.3%, giving back the lion’s share of yesterday’s gains and US equity futures
are lower. Benchmark 10-year yields are off 3-9 bp in Europe, with widening
core-periphery yields. The yield on the 10-year US Treasury is off a dozen
basis points to about 3.56%. Two-year yields are also sharply lower, led by the
15-16 bp decline in Germany and France (Italy’s two-year yield off a couple
basis points). The two-year US yield is down seven basis points to 4.18%. The US dollar is firmer against
all the G10 currencies but the Japanese yen. The Norwegian krone and euro are
under the most pressure, off about 0.5%. After the yen, the

Overview: The dramatic shift in expectations for Fed
policy is a potent shock, with reverberations throughout the capital markets. 
The business press was full of accounts putting the nearly 50 bp decline in the
US two-year note in an historical perspective. Yesterday, it fell by 61 bp as
the market continued to unwind Fed hikes and reprice the chances of a cut as
early as Q2. While the poorly received bill auctions suggests not significant
deposit flight, the KBW ETF (cap-weighted US bank index) fell 11.3% yesterday
about what it has lost last Thursday and Friday. Adding insult to injury, it
settled below where it had opened. The shift in US rate expectations after the
jobs report in early February helped the dollar recoup some of what it had lost
in the

Overview:  Federal Reserve Chair Powell’s comments to
the Senate Banking Committee were seen as hawkish by the market, even though it
has been clear to most observers that the 5.10% median terminal rate that the
Fed projected in December would be increased. Also, it seemed well appreciated
a few Fed officials support a 50 bp hike at the February 1 FOMC meeting, two
days before a "hot" jobs report that showed over 500k jobs were
filled. It would just seem to go without saying that given the strong data,
there is little reason for them to raise the issue again.  US short-term
rates rose, and the two-year yield rose 12 bp poke move above 5%. Asian and
European stocks were mostly lower with the weaker yen arguably helping the
Japanese stocks resist the pull. US

Overview: The US dollar is trading with a firmer bias against
nearly all the G10 currencies ahead of Federal Reserve Chairman Powell’s
semi-annual testimony before Congress. Speaking for the Federal Reserve, the
Chair is likely to stay on message which is higher rates are necessary to cool
the overheating economy. This comes on the heels of the Reserve Bank of
Australia’s 25 bp hike and indication that it is not pre-committing to an April
hike. The Australian dollar is the heaviest of the major currencies, falling
around 0.8% to a new low for the year. Most emerging market currencies are also
trading lower, though the Mexican peso, the strongest currency this year, is
firm near its recent highs. Chinese stocks in the mainland and in Hong Kong traded lower as the

Overview: The modest economic goals announced as
China’s National People’s Congress starts was seen as a cautionary sign after
growth disappointed last year. It seemed to weigh on Chinese stocks, though
others large bourses in the region advanced, led by Japan’s Nikkei and South
Korea with gains of more than 1%. Europe’s Stoxx 600 is little changed after
rising for the past two sessions. US index futures are slightly softer. Strong
gains were seen before the weekend. Benchmark 10-year yields are softer across
the board. European yields are off mostly 6-8 bp with the peripheral premiums
narrowing a little. The 10-year US Treasury yield that had punched through 4%
last week is near 3.92% today. The US dollar is mostly firmer,
but against several pairs, remains

The
dollar peaked last September/October and trended lower until the January jobs
report and strong service ISM on February 3. These reports and firm inflation
readings, owing, at least in part, to benchmark and methodological changes,
helped spur the greenback’s recovery. However, we learned last week that auto sales
and the service ISM prices paid decelerated in February, and this week, we will
learn that job growth has slowed considerably. If accurate, the median forecast in
Bloomberg’s survey of 200k would be the least since the end of 2020. We look
for the February employment report to mark a string of softer economic data,
including CPI (March 14), which may slip below 6% for the first time since
September 2021. This may help stabilize US interest rates and

Overview: Talk from two Fed officials yesterday,
which seemed to validate market expectations eased the upward pressure on the
dollar and helped equities launch a dramatic recovery. The market is pricing in a terminal rate near 5.50%, a little higher than the median dot in December. The S&P 500 posted a
dramatic recover and posted a potential bullish key reversal. Its 0.75% closing
gain was the largest advance in nearly three weeks. A large drop in Tokyo’s
February CPI helped take pressure of Japanese government bonds where the
10-year JGB was pushing through its 0.50% cap. Japanese and Indian equities led
the regional equity markets higher. Europe’s Stoxx 600 is up 0.7% to bring the
weekly gain to around 1.2%. US equity futures also enjoy a firmer bias. This

Overview: The jump in prices paid in yesterday’s US
ISM manufacturing coupled with the stronger eurozone inflation, with a new
cyclical high reported in the core rate, underscores the market theme of
higher-for-longer. This is seen as dollar supportive but also negative for
risk-assets, including and especially equities. European benchmark 10-year
yields are up another couple of basis points today and the 10-year US Treasury
yield is pushing above 4% for the first time since last November. European
two-year yields narrowly mixed, while the two-year US rate is reached almost
4.94%, a new high since 2007.

Asia Pacific equities were
mostly lower, with South Korea, returning from holiday, and Australia, notable
exceptions. Europe’s Stoxx 600 is lower for the third

Price pressures remain elevated, and labor
markets are strong, giving most policymakers in the G10 the incentive to continue
raising interest interests. There are two exceptions: Japan, the only
country still with a negative policy rate (-0.10%), and Canada, where the
central bank has indicated it would pause. While half-point hikes or larger
were common in the second half of last year, the major central banks have
slowed or will slow the pace to quarter-point moves as the endgame is in sight
in either late Q2 or early Q3. The European Central Bank stands out as the exception, which has
pre-committed to a 50 bp at its March meeting, even before the staff provides
new forecasts. It may also be early to rule out a 50 bp
hike at the early May meeting. Four

Overview: Many investors may be skeptical of the
accuracy of Chinese data, but its stronger than expected February PMI animated
the animal spirits and bolstered risk-taking appetites. Asia Pacific equities
jumped, led by the 4.2% rally in Hong Kong and a 5% surge in the index that
tracks mainland shares. Among the long bourses Australia and Singapore slipped,
and South Korean markets were closed for a national holiday. Europe’s Stoxx 600
is posting a small gain and US index futures are trading higher. European
10-year yields are mostly 5-6 bp higher, though UK Gilts are bucking the move
and the 10-year yield is a little softer. The US 10-year Treasury yield is firm
near 3.94%.The dollar is broadly lower. The
New Zealand dollar is leading the charge with a 1%

A key issue facing
businesses and investors is whether the US January data reflects a
reacceleration of the world’s largest economy or whether it was mostly a
payback for extremely poor November and December 2022 data and seasonal
adjustments and methodological distortions. Given the centrality of the US
economy and rates, it is not simply a question for America, the Federal
Reserve, and investors, but the implications are much broader. The issue is unlikely to be resolved in the week ahead, but it may begin
pointing to the direction ahead. To believe in the now much-touted
"no-landing" or "soft landing scenario" requires the bold
and dangerous claim that this time is different. That the
inversions of the yield curve, including the 3-month bill and its 18-month

Overview:  Rising rates and falling stocks provided the
backdrop for the foreign exchange market this week. The dollar appreciated
against all the G10 currencies but the Swedish krona, which is still correcting
higher after the hawkish pivot by the central bank. The market looks for a
later and higher peak in the Fed funds rate. This coupled with the risk-off
sentiment helped the dollar extend its recovery after falling since last
September-October. The yen’s weakness on a less than hawkish comments from what
is most likely to be the BOJ’s new leadership helped lift Japanese stocks today
and pared with week’s losses. Most of the other large bourses in the Asia
Pacific area fell today and this week. Europe’s Stoxx 600 is slightly firmer
but is also paring this

Overview:  The prospect that the Federal Reserve tightening
cycle continues into early Q3 is underpinning the greenback today against
most of the G10 currencies. The dollar bloc is the notable exception, and they
are posting minor gains, perhaps encouraged by the firmer equity markets. The
minutes of this month’s FOMC meeting appear to show wide support for quarter
point hikes going forward and there did not seem to be much discussion of the
conditions that would allow for the central bank to pause, which the market had
expected around by the end of Q2. The euro has been sold below $1.06, while the
greenback is holding just below JPY135 ahead of a big day tomorrow in Tokyo,
which seen national inflation figures and BOJ Governor nominee Ueda questioned in
the

Overview: The surge in US interest rates and sharp
losses in US stocks sent the dollar broadly higher in North America yesterday. The
$42 bln of two-year notes auctioned by the US Treasury saw the highest yield in
more than a quarter-of-a-century (4.67%) and it still produced a small tail.
Sterling, helped by its own surprisingly strong data, was the only G10 currency
to have gained against the surging dollar. Still, no important technical levels
were breached, though the greenback rose to nearly seven-week highs against the
Canadian dollar. The US dollar also rose to new highs for the year against the
Japanese yen before settling at about JPY135.00.

Rising US rates and falling
stocks are the main driver and the FOMC minutes later today are the focus. While
the

Overview: Rising interest rates are weighing on risk
appetites and the dollar is broadly stronger. Sterling is a notable exception
after a stronger than expected flash PMI and better than expected public
finances. The correlation between higher US rates and a weaker yen is
increasing and the greenback looks poised to rechallenge the JPY135 area. A
slightly better than expected preliminary PMI and hawkish minutes from the
recent RBA meeting has done little to support the Australian dollar, which is
among the weakest of the G10 currencies today. Nearly all the emerging market
currencies are softer today. While mainland Chinese equities
and Korea and Taiwan eked out small gains, the other larger Asia Pacific
bourses fell. Hong Kong and mainland shares that trade

The dollar is mostly softer, but
turnover is mostly quiet.  The Swedish krona leads the move after
higher-than-expected underlying inflation.  It is a mild risk-on day with
equities moving higher too.  In the Asia Pacific region, China stood with
the CSI 300 up almost 2.5%.  Europe’s Stoxx 600 is up fractionally to
recoup most of the pre-weekend decline.  US equity futures are narrowly
mixed.  European bond yields are little changed, with a couple of
exceptions:  Sweden 6-7 bp higher on the back of the inflation and UK
yields a few basis point softer even though the UK is expected to report its
large January budget deficit in a quarter of a century tomorrow.   China
indicated it will propose a peace plan for Russia-Ukraine on February 24, the
anniversary of

The pendulum of market sentiment swung from
fear of a synchronized recession in the US and Europe to optimism that a
recession can be avoid. The perceived reduction of downside risks had driven
the upside performance of equities and bonds. Just as the data seems to confirm
it, the rally in in stocks and bonds faltered. The MSCI Emerging Markets equity
index gained 7.8% last month but is off almost 3.8% this month, and has fallen for three consecutive weeks. The performance
of the developed markets has held up better. The MSCI World Index (developed
economies) rose 7.0% in January and is up slightly so far here in February. A reassessment of the trajectory of Fed policy, which has
seen the markets converge with the Fed’s message, has helped the dollar correct

Overview:  A series of strong US high-frequency
data points after a poor finish to last year has spurred a dramatic shift in
market expectations. And talk among a couple of (non-voting) FOMC members of a
50 bp hike has provided added fodder. The greenback is extending its recovery
today against all the major currencies, with the Australian and New Zealand
dollars hit the hardest. Emerging market currencies have also been knocked
back. This is part of a larger risk
off move and even the yen’s decline to new lows for the year failed to help
Japanese equities. Indeed, Japan, Hong Kong, and China saw more than a 1% slide
in their main equity indices. Europe’s Stoxx 600’s four-day rally is being
snapped, and US futures indices are 0.5%-0.75% lower. Benchmark 10-year

Overview:  On the
heels of a dramatic jump in US job creation and firmer than expected
year-over-year CPI, the US reported a larger than expected jump in retail sales
and a strong recovery in manufacturing output. Few think that economic momentum
that the recent data implies can be repeated, the "no landing" camp
has gained adherents. We suspect that says more about psychology than the
economy. The US two-year note is threatening to snap a five-day 20 bp advance today
and is coinciding with a somewhat heavier dollar tone. There is a batch of US
economic data today, including PPI, weekly jobless claims, and housing starts
and permits. Several Fed officials speak today, including St. Louis Fed’s
Bullard, who is among the leading hawks. China
reported new house

Overview: Although the US January CPI was in line with
expectations, the year-over-year rate was a little firmer than expected. Still, the measure that Fed Chair Powell has underscored, core services, excluding shelter, moderated with a 0.3% month-over-month gain. US rates shot up and this lent
the dollar support, while weighing on equities and risk sentiment. The US
two-year note yield rose to almost 4.64% yesterday, the highest in three months.
The greenback is higher with the Australian and New Zealand dollars knocked the
most (~1.3% and 0.9%, respectively). Softer UK inflation is taking a toll on
sterling (~-0.8%). The large bourses in Asia were mostly lower, with India a notable exception.
Europe’s Stoxx 600 has shrugged off the global headwinds and is

Overview: The focus is on the US CPI report today, but the price action is anything but intuitive. Although the revisions of the basket and methodological changes reinforce expectations for the largest rise in three months, the US dollar continues to trade heavily after rallying last week. The dollar-bloc currencies are underperforming today. And US rates are softer. The US 2- and 10-year yields are 1-2 bp lower.
Most of the large bourses in the Asia Pacific rallied. Hong Kong was a notable exception and the HKMA intervened to support the Hong Kong dollar for the first time since last November. Europe’s Stoxx 600 is up 0.5% and is at its best level in a year. Benchmark 10-year yields are mixed, with the core yields mostly softer. Japan reported weaker than

Overview: A consolidative tone is mostly the theme of the day. The revisions to the US CPI announced before the weekend add to the uncertainty and focus on tomorrow’s report. At the same time, investors watch ongoing air space activity that has led to a few objects being shot down over the US and Canadian airspace. Yet the fear of escalation seems too mild still, but China’s ability to secure a rapprochement and leave its “wolf diplomacy” behind is strained, even as it renews imports (coal) from Australia. Its aerial harassment of Taiwan reportedly continued over the weekend.
Chinese bourses were the only large market in the Asia Pacific region that advanced today. Despite the yen’s pullback, Japanese stocks were sold with the Nikkei off almost 0.9%. Meanwhile,

After selling off sharply in the past four months, the dollar rebounded. Since the FOMC meeting on February 1, it has enjoyed one of the strongest bounces since it topped out in late September/early October. The incredible US jobs data, sharp bounce in the January services ISM, speculation of BOJ Governor Kuroda’s successor, and some easing of the euphoria over China’s re-opening have been notable drivers. The dramatic rise in the US two-year note illustrates the adjustment. The yield rose from the lower end of its range that goes back to the middle of last September (~4.0%) to the upper end near 4.50%.
Market positioning was part of the pre-conditions that led to such an impulsive surge in the dollar. However, several of the currency pairs have met technical