1. ECB plans to raise interest rates for the first time in a decade. This comes in a wave of rate hikes, including 55 other central banks across the world who have in the past 6 months hikes rates by at least 50 bps.
2. Big investors have cut their risk exposure and equity investments to levels lower than those observed in GFC. Top investment managers are now together holding 6.1% in cash, an all time high. Managers have been rotating out of cyclicals to the more defensive sectors, like consumer staples and utilities.
3. The EU is pulling all levers to push energy demand lower amidst higher energy import tensions negatively impacting the EU currencies. With inflation rising in an area where 0 interest rate has been the norm from long, is offering strength to EUR after it attained parity with USD.
4. We are witnessing a real story unforeseen by the Fed putting massive upward pressure on the consumer inflation targets. Fed hiked rates with an intent to reduce demand and make investments costlier. Given the rising interest, people couldn’t afford homes and then turned to rent places, this did not reduce the prices of the new homes, but in turn increased rents massively and have been sticky upwards and this now in turn is adding more pressure to the inflation index (as rents is 35% of the index)
5. We can't forget that there was a time back in Sept 2021, when the Fed came up with inflation averaging to increase the inflation above the long term 2% target. I think the war has exacerbated the issue and now, it's becoming extremely tough for the Fed to achieve the 2% target without hitting growth.
6. Chinese savings rate curve has inverted with 3 months savings rate more 10 year savings rate by more than 40 bps. Though the treasury curve is still steep, the savings rate clearly indicates that the locals are losing confidence in the long term growth trajectory with China just escaping a slowdown last quarter with .4% growth.
7. Strong dollar wipes out billions of US corp earnings. Companies with large foreign sales are suffering the dollar rise pain. Furthermore, companies with large exposure in the Euro and China markets are affected by the recessionary trend which slackens the demand. 59% of the sales of US tech companies are offshore. Every 8 to 10 percent rise in dollar cuts almost 1% of S&P earnings. This can be the impetus to deglobalization, as US investors channel more money towards companies with US business, and countries importing US goods start making in house goods due to expensive imports
8. The 3M libor rate jumped the highest intraday, soaring to the highest level in more than 3 years. It rose by 23 bp to 2.7% in the largest one day increase from September 2008. The 3m OIS basis also expanded to 12bp from -5.7 bp the prior session.
9. California state has started seeing the higher mortgage rates biting into the ever raging housing market of the state. This will clearly have negative consequences on the RMBS markets and CMBS prices. Falling equity share in the mortgage can also backfire on the mortgage market.
10. With the demise of LIBORs across major currencies, we see that the Tenor Basis Swap market activity is diminishing significantly. This would give rise to more STIR products including the SOFR, BSBY index instruments.
11. The debate about whether the Fed can tame inflation without inducing a recession is unjust as the key reason for the current inflationary trend is Ukraine war and post covid adjustments which have nothing to do with the fundamental economic performance. Inflation hits hardest on the lower income groups and they spend a major share on food and energy. But recession would deprive them of the pay cheque to service their living cost.
12. Much of the higher nominal spending in the Euro area is taken by the higher energy prices, leaving barely any space for real growth. Furthermore, with growing uncertainties around the Ukraine war, producers have been pessimistic of the markets. Slowing Euro makes imports more expensive, leading to depreciating forex balances.
13. Interesting Charts:
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