Friday’s Fundamental Forecast -18th March



US equities were stronger Thursday, ignoring all the recessionary and Fed policy mistakes clamouring with the S&P up 1.2%. S10yr yields down 2bps to 2.17%, oil back up 8.8%. To get more news about investous, you can visit wikifx.com official website.

And while stock markets liquidity isn’t getting any better, market internals is showing signs of improvement as shorter duration on kneejerk S&P 500 selling points to a decrease in speculative reactions to news flows. And if investors were indeed turning bearish longer term, they would buy-the-dip less often and start to profit take consistently on rallies.

A dovish hike from BoE hiked 25bps as expected, but no dissenters were looking for 50bps.

Its been a remarkable turn of events in FX land even though a hawkish Fed, which one would have thought would have supported the US dollar. However, the underlying risk tone was improving with the ‘china put’ and Ukraine optimism. Hence, the certainty allows people to re-enter SPX longs, and then FX tends to have that mechanical reaction to chase risk higher. Still, we need to be careful how we position FX as this was not the typical reaction one would have expected, but perhaps pricing in peak Fed hawkishness will allow the currency markets to climb.

While I have some sympathy with the view that we have now reached peak hawkishness, the fact is that this was still an extremely hawkish pivot from the Fed both in substance as well as quantitatively, with Fed Chair Powell making it quite clear during the Q&A that they will become even more aggressive if needed to tame inflation even at the expense of growth.

Still, the Fed thinks it can achieve the impossible trinity of hiking rates, bringing inflation down while unemployment remains below long-run neutral. The bond and currency markets say no! The US curve bull flatted, and the dollar sagged across the board. Even a dovish hike by the BoE still had folks buying GBP straight up vs the dollar.
The US dollar no longer appears to be the cleanest dirty shirt in the laundry this week as the Fed starts to walk the impossible trinity tight rope. But we also have very different reactions at the big three G-10 central banks.

The ECB is focused entirely on pulling inflation down; the Fed is trying cool the economy and bring growth back towards the trend, but also get inflation down; the Bank of England is far more concerned by growth than inflation – easily the least hawkish of the three (though it started the hiking cycle some months ago). The key for the BoE seems to be no more than containing inflation expectations rather than chasing inflation down.