Month: March 2022

Sen. Susan Collins (R-ME) has become the first Republican to cross party lines in support of Biden Supreme Court nominee, Judge Ketanji Brown Jackson.

In a statement to the New York Times, Collins said she made the decision after two personal meetings with Jackson – the second on Tuesday afternoon, which the Senator said ‘alleviated’ some concerns over a host of divisive issues including Jackson’s record of handing down light sentences to pedophiles.

“I have decided to support the confirmation of Judge Jackson to be a member of the Supreme Court,” said Collins.

“In recent years, senators on both sides of the aisle have gotten away from what I perceive to be the appropriate process for evaluating judicial nominees,” she added. “In my view, the role under the Constitution assigned to the Senate is to look at the credentials, experience and qualifications of the nominee. It is not to assess whether a nominee reflects the individual ideology of a senator or would vote exactly as an individual senator would want.“

Her decision will allow Mr. Biden and Senate Democrats to claim some degree of bipartisanship around the historic nomination, though whether other Republicans will join Ms. Collins remains unclear.

If Democrats stay united, it would also avoid the spectacle of Vice President Kamala Harris having to break a tie to seat a nominee on the Supreme Court, an unprecedented outcome that some saw as potentially damaging to the court’s standing. -NYT

Collins has previously been willing to support Democratic Supreme Court picks, saying that presidents should have latitude in their nominees. She notably opposed President Trump’s nomination of Justice Amy Coney Barrett in 2020 – objecting to the vote being held days before the US election. Collins also was one of only three Republicans to vote to confirm Jackson in her current seat on the US Court of Appeals for the DC Circuit.

In what Israeli Prime Minister Naftali Bennett is calling “a new wave of terror” – chaos was unleashed in central Israel Tuesday in the third terror attack this week. Police identified that a 27-year old Palestinian man from the West Bank went on a shooting rampage with an assault rifle in two ultra-Orthodox towns just east of Tel Aviv, killing five people.

“Residents of the ultra-orthodox town of Bnei Brak and the neighboring town of Ramat Gan reported that a man had driven around and opened fire at passers-by, and Israeli police later said security forces killed the assailant,” according to France24.

It appears that authorities believe the gunman may have had accomplices, given that as the Associated Press reports in total five Palestinians allegedly involved in the mass killing were arrested. However some reports say they are members of the suspect’s family.

“We unfortunately have to note that five people have died,” the head of the Magen David Adom emergency responders, Eli Bin, announced after the terror rampage across two towns. Israeli police on Wednesday identified two of the five male victims as Ukrainian nationals. 

There’s been a noticeable uptick in violence just ahead of the Islamic holy month of Ramadan, with international reports citing 11 victims killed in only a week. France24 details:

Tuesday’s killings mark the third deadly attack in Israel in a week, bringing the combined death toll to 11, excluding perpetrators. 

A shooting on Sunday killed two Israeli police officers – identified as Shirel Aboukrat, a French-Israeli citizen, and Yezen Falah – in the northern city of Hadera. That attack was later claimed by the Islamic State group – the jihadists’ first claim of an attack on Israeli territory since 2017.

Israeli PM Bennett warned his country is “facing a wave of murderous … terrorism” – and US Secretary of State Antony Blinken condemned the shootings a “terrorist attack” while calling the fresh violence “unacceptable”. 

Via Times of Israel: Newly released security camera footage from yesterday’s terror attack in Bnei Brak shows several children flee from the Palestinian assailant as he runs down a street in the city armed with a M-16.

בתיעוד חדש מאחת הזירות בפיגוע בבני ברק נראה המחבל רץ עם נשק שלוף מבניין לבניין וילדים בורחים@moyshis pic.twitter.com/AoaFILqfOH

— כאן חדשות (@kann_news) March 30, 2022

Though Hamas had earlier in the week appeared to praise the prior attacks, calling them a “natural and legitimate response” to Israeli “crimes against our people” – Palestinian Authority leader Mahmoud Abbas in contrast denounced this week’s killings.

“The killing of Palestinian and Israeli civilians will only lead to further deterioration of the situation, while we are all striving for stability,” Abbas said according to Wafa news agency.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Inflation is running hot, and the Fed is projecting seven rate increases this year alone. As if that is not concerning enough for bond investors, the Fed hints at draining liquidity via balance sheet reduction, i.e., Quantitative Tightening (QT).

At Jerome Powell’s post-March 16, 2022, FOMC press conference, he stated: “it’s clearly time to raise interest rates and begin the balance sheet shrinkage.” Based on further comments, Powell wants to start normalizing the Fed’s balance sheet and drain liquidity as early as May.

Since March of 2020, the Fed has bought about $3.5 trillion in U.S Treasury securities and $1.5 trillion in mortgage debt. The gush of liquidity from the Fed’s QE program helped the U.S. Treasury run massive pandemic-related deficits. Buying over half of the Treasury’s debt issuance in 2020 and 2021 limited the supply of bonds on the market and upward pressure on interest rates.  

Equally important to the Fed, QE comforted investors in March of 2020 and further boosted many asset prices throughout its existence.

With QE finished and QT on the horizon, we answer a few questions to help you better appreciate what QT is, how it will operate, and discuss how the Fed draining liquidity will affect markets.  

What are QE and QT?

Quantitative Easing (QE) is the process in which the Fed purchases Treasury and Mortgage bonds from banks. In exchange, the banks receive reserves from the Fed. These reserves are not cash but are the basis by which banks can lend money. All money is lent into existence. As such, there is an indirect connection between QE and money printing.

Via QE operations, the Fed removes assets from the markets. The supply reduction creates a supply-demand imbalance for the assets they buy and the entire pool of financial assets. As a result, QE tends to help most asset prices. For this reason, QE has become the Fed’s most important tool for fighting market instability and thereby boosting investor confidence.

For more on how QE supports asset prices, we suggest reading our article- The Fed is Juicing Stocks.

Quantitative Tightening (QT) is the opposite of QE. During QT, the Fed shrinks its balance sheet. QT has only been attempted once. In 2018, the Fed embarked on QT, as circled in the graph below. At the time, they ultimately reduced the balance sheet by $675 billion. Ironically, the liquidity drain forced the Fed to return to QE in 2019 as hedge funds ran into liquidity problems. QT exposed the fragility of our overleveraged financial system and its reliance upon easy money.

Perspective on QE 4

Before we progress, it’s worth providing perspective on how massive the pandemic round of QE (QE4) was compared to prior rounds of QE. Eric Parnell sums it up nicely:

• For example, it took the Fed more than a year to deploy $300 billion in Treasury purchases as part of QE1. In response to COVID, the Fed purchased $300 billion in Treasuries in just three days.

• It took the Fed nearly eight months to carry out $600 billion in Treasury purchases as part of QE2. During the COVID outbreak, the Fed made $600 billion in Treasury purchases in six days.

• And it took the Fed 22 months to carry out $1.5 trillion in Treasury purchases as part of QE3, which until COVID was considered the epic QE program. But during COVID, they matched this $1.5 trillion in Treasury purchases in just over a month.

• And then they continued gobbling up Treasuries at a rate of $80 billion per month, or nearly $1 trillion a year, for the next year and a half through late 2021 before FINALLY starting to wind the program down.

How Much QT Might The Fed Do?

The rectangle in the graph above highlights the massive $5 trillion increase in the Fed’s balance sheet over the last two years. With the Fed Funds rate now on the rise and inflation the number one enemy of the Fed, numerous Fed members have made it clear they want to normalize the Fed’s balance sheet.

Does “normalizing” mean they will reduce the $5 trillion they recently increased it by?

To help us guesstimate what normalization entails, we lean on Joseph Wang and his blog Fed Guy. Joseph was a senior trader on the Fed’s open market desk responsible for executing QE and QT. As such, he understands the mechanics of QE and QT better than just about anyone else. 

In his more recent article The Great Steepening he states:

“Chair Powell has sketched out the contours of the upcoming QT program through a series of appearances. He noted at a recent Congressional hearing that it may take around 3 years to normalize the Fed’s $9t balance sheet. The Fed estimates its “normalized” balance sheet based on its perception of the banking system’s demand for reserves. A conservative estimate based on the pre-pandemic Fed balance sheet size and taking into account growth in nominal GDP and currency, arrives at a normalized balance sheet of around $6t. This would imply QT at rate of ~$1t a year, roughly twice the annual pace of the prior QT.”

How Will They Do QT?

The Fed has two options to drain liquidity and reduce its balance sheet. It can let bonds mature. It can also sell bonds to the market.

The graph below shows that over half of the Fed’s bond holdings mature within four years. The preponderance of shorter maturity bonds allows the Fed to rely on maturation easily. Only 25% of the bonds mature in ten years or more. Also, note the x-axis is missing the years 2033-2035. This is because they do not hold any bonds with those maturities.

Despite many short, dated bonds, the Fed could instead select to sell bonds. Doing so would allow them to manage the yield curve. For instance, if they announced a program to replace all maturing issues with new short-term bonds and instead sell longer-term bonds to help them drain liquidity, longer maturity yields would rise and shorter maturity yields would fall.

Creating a steeper yield curve, as such an action might do, might be advantageous to banks that tend to lend long and borrow short. It would also help the government with lower borrowing rates. The Treasury relies heavily on shorter-term bonds to fund its deficits. As of the end of 2021, over half of the Treasury debt outstanding matures in three years or less.

The Fed is Limited What It Can Do

Some Fed watchers say the Fed may sell bonds and use QT to affect the yield curve. While we would put nothing past them, the limited number of longer-term bonds they have for sale makes any meaningful yield curve control unlikely.

We think they will avoid selling longer-term bonds. Yields have risen significantly over the past few months. With mortgage rates near 5% and corporate yields rising sharply, the fed will likely want to limit any additional economic harm higher rates will cause.

Can they solely rely on bond maturities to accomplish $1 trillion a year of QT?

The graph below compares a $1 trillion QT run rate ($83.33 bn per month) versus the Fed’s bond maturities for the remainder of 2022.

As we show, there are only two months, September, and October, in which the amount of bonds maturing is less than the $1 trillion run rate. In both cases, the differences are minimal. Also, note that the Fed will have to buy bonds in the remaining months.

For example, in April 2022, $150 billion in bonds will mature. If the Fed limits balance sheet reduction to $83 billion, they will have to buy about $67 billion in bonds.

In 2023, assuming they are still doing QT, there are five months in which they will need to sell bonds. The largest being $20 billion. That said, purchases in 2022 could easily cover those gaps by 2023.

What are the Consequences?

The most considerable effect of QT will likely be on Treasury supply and financial markets.

The graph below shows that if the Fed follows a $1 trillion per year QT path, the net supply of Treasury debt will be significant. The black line plots annual issuance. The orange line subtracts Fed purchases to arrive at a net issuance/supply amount. The net issuance (after Fed purchases) was about $1.5 trillion during the Pandemic. The Fed absorbed a large portion of the massive fiscal stimulus.

The red dotted line projects the net supply/issuance in the future. Assuming $1.75 trillion in annual borrowing and $1 trillion a year of QT, investors will have to absorb $2.75 trillion of Treasury bonds. That is well above the levels of 2020 and 2021 and nearly 3x the amount in the years before the Pandemic. On its own, such a jump in supply is a recipe for higher yields.

The Fed may want to normalize its balance sheet, but it may not be possible without causing problems in the Treasury market.

QT will also be problematic for many other asset markets. As discussed earlier, removing assets from the global asset pool helped increase asset prices. The extra bonds on the market via the Fed and new Treasury supply require draining liquidity from other assets to fund the U.S. Treasury. Just as QE helped asset prices, QT should equally hurt them.

Summary

The Fed attempted QT in 2018 in what is generally considered a failed attempt to normalize the balance sheet. As they learned, the markets are too overleveraged to drain enough liquidity to normalize the Fed’s balance sheet.

Today, the Fed has grander QT plans despite higher asset valuations than in 2018 and more financial leverage throughout the economy. The odds of the Fed fully normalizing the balance sheet by $3 trillion are slim to none. It is more likely the financial markets cry uncle, and the Fed comes to the rescue once again.

QE 5 is closer than most investors think!

While it’s ancient history now, and attention is turning not so much to economic growth in the current quarter but rather what will happen in the near future now that the yield curve has inverted and a recession is imminent, moments ago the BEA reported its third and final estimate of Q4 GDP which came at 6.9%, just a fraction below the 2nd estimate and the consensus forecast of 7.0%.

Developing

Having soared on optimism yesterday amid chatter of Russian forces retreating, Ukrainian President Zelenskiy poured some cold water on that hope by noting that Russia is sending new forces during a speech to the Norwegian parliament. He also warned that he sees risk in the Black Sea from Russian mines.

His comments follow a statement from the Kremlin said there are no breakthroughs in talks with Ukraine.

That headline triggered selling in futures and the algos too stocks to overnight lows…

Gold jumped on the headlines…

Oil was also bid…

Will the dip-buyers step back in… because they know better?

Following February’s bigger than expected jump in payrolls (ADP and BLS both rose, but BLS was notably higher than ADP), analysts expected a modest slowdown in job gains for ADP in March (even as The Conference Board’s labor market indicator soars to record highs – ‘jobs plentiful’ at its highest vs ‘jobs hard to get’ ever)…

Source: Bloomberg

So against expectations of a 450k rise, ADP reported a +455k rise in jobs for March (and revised February’s gains up from 475k to 486k)

Source: Bloomberg

Services jobs once again dominated Goods-producting jobs (+377k to +79k)

No sectors saw job losses in March as the Omicron wave evaporates.

“Job growth was broad-based across sectors in March, contributing to the nearly 1.5 million jobs added for the first quarter in 2022,” said Nela Richardson, chief economist, ADP.

“Businesses are hiring, specifically among the service providers which had the most ground to make up due to early pandemic losses. However, a tight labor supply remains an obstacle for continued growth in consumer-facing industries.”

Nonfarm payrolls consensus forecast for Friday is +490k, so this BLS data is unlikely to change anything.

By John Kemp, senior market analyst at Reuters

U.S. road traffic volumes have recovered to pre-pandemic levels as businesses have re-opened, commuting has resumed in most cities and leisure trips return.

Gasoline consumption has recovered to pre-pandemic rates, though use is a little lower than might be expected based on miles-driven, which is increasing the pressure on already-stretched global petroleum supplies.

U.S. cars and trucks drove 275 billion vehicle-miles in December 2021, after seasonal adjustments, according to the results of local traffic surveys compiled by the Federal Highway Administration.

Vehicle-miles travelled were up from 269 billion in December 2019, on the eve of the pandemic, and approaching the record of 277 billion set in December 2018.

There was a slight dip in seasonally adjusted traffic in January 2022 as a result of local work-from-home orders and business closures. But with most areas rapidly exiting epidemic controls, volumes are likely to reach record levels over the next few months.

Traffic volumes are still well below where they would have been in the absence of the pandemic if they had continued increasing on the pre-2020 trend.  But gasoline consumption, as measured by the volume of fuel supplied to retailers and end-users, had recovered to pre-pandemic levels by the end of last year.

Like traffic flows, gasoline use was hit temporarily by the reintroduction of local work from home orders and business closures at the start of this year.  Nonetheless, gasoline consumption is on course to exceed the pre-pandemic cyclical high this summer as a result of high levels of employment and leisure driving.

Gasoline inventories held by refineries, blenders and wholesalers stand at 238 million barrels, slightly below the pre-pandemic five-year seasonal average of 241 million barrels.

U.S. refineries are producing 9.8 million barrels per day (bpd) of gasoline compared with an average of 9.7 million bpd at this point in 2015-2019.

With diesel stocks more than 20% below the pre-pandemic average, however, refiners have no scope to alter the gasoline-diesel production mix.

Higher gasoline consumption this summer will therefore translate directly into higher refinery crude processing rates and intensify upward pressure on crude prices.

Gasoline and especially diesel prices have been rising rapidly, even faster than crude, signalling the need for slower growth in fuel use.

Slower fuel consumption is most likely to come from a slowdown in manufacturing activity and freight movements since distillates are the most cyclically sensitive part of the fuel system. At the margin, however, the steep rise in gasoline prices will also discourage discretionary driving by encouraging more working from home and less leisure travel.

More importantly, if the business cycle slowdown causes a fall in employment and incomes it would directly reduce traffic volumes and fuel consumption.

S&P 500 futures edged lower along with European shares, as the “peace in our time” optimism that pushed stocks on a history bear market short and gamma squeeze rally in the past two weeks fizzled and was instead replaced with the far less pleasant reality that de-escalation of the war in Ukraine is exaggerated as the Kremlin said that talks with Ukraine in Istanbul Tuesday yielded no breakthroughs and refused to discuss the status of Crimea as part of a peace deal, as the Russian constitution prohibits anyone discussing the fate of Russian regions. The S&P futures were 0.3% lower while Nasdaq futures declined 0.4%. Commodities climbed, fueling renewed concerns about inflation’s impact on profits and economic growth while the inversion of the 2s10s yield curve that started the clock on the next recession did not help investor mood. Europe’s Stoxx 600 snapped a three-day winning streak after surging to the highest level in five weeks and oil futures gained over 2%. The dollar slipped, the euro climbed and the yen bounced from a six-year low after the Bank of Japan pledged to buy more securities than planned and include longer-dated debt.

“The yield curve inversion needs to be sustained before it’s a predictor of anything,” Mariann Montagne, senior portfolio manager at Gradient Investments , said on Bloomberg Television. “We’ll have volatility both in the stock and the bond markets but we think that progression” on the cease-fire talks will lead to upward earnings revisions.

Apple shares were slightly lower in premarket trading, set to end their longest winning streak since 2003 after the iPhone maker surged nearly 20% over the past 11 days. Chinese live-streaming platforms fell in U.S. premarket trading after Chinese government agencies vowed to crack down on any tax-related crimes in the sector. Bilibili (BILI US) falls 3.8%, HUYA (HUYA US) -4.4%. Other notable premarket movers:

• BioNTech (BNTX US) rises 3% premarket as the Covid-19 vaccine- maker says it’s planning a share buyback of as much as $1.5 billion and will propose a special dividend.
• Chewy (CHWY US) slumps 14% in premarket trading after the online pet products retailer’s results missed estimates and it forecast slower-than- anticipated sales growth.
• Microvast (MVST US) slumps 14% in premarket after the battery solutions provider reported 2021 results, with the company’s CEO flagging “many headwinds” in the release.
• RH (RH US) falls 14% premarket after the furniture retailer’s fourth-quarter results missed expectations amid “softening” demand in the current quarter.
• Romeo Power (RMO US) shares jump 7.1% in premarket after the battery-products maker said it has started shipping its first production pedigree packs to a key customer.

On Tuesday, the S&P 500 rallied to the highest level since mid-January. Skeptical NATO allies are evaluating whether Russia’s promise to scale back military operations in Ukraine marks a turning point in the conflict or simply a tactical shift as attacks were still reported near Kiev. Here are some of the latest developments involving the Ukraine war courtesy of Newsquawk:

• Ukrainian President Zelenskiy said they are not reducing defensive efforts as the Russian army still has significant potential to carry out attacks, according to Reuters.
• Ukraine Deputy PM says three humanitarian corridors have been agreed for evacuations on Wednesday; said Ukraine had requested 97 corridors to be opened in the worst-hit areas. Ukraine Forces warn of danger of Russian ammunition exploding at Chernobyl.
• Ukraine Presidential Adviser says on negotiations, Ukraine has improved its position in all respects.
• Russian Kremlin says Ukraine has begun to put demands down on paper and be more specific which is a positive thing. Not seen anything really promising that looks like a breakthrough, there is a lot of work ahead
• Governor of Donestsk region says situation is difficult, shelling is continuing in nearly all cities around the demarcation line.

Germany triggered an emergency plan to brace for a potential Russian gas cut-off, as President Vladimir Putin steps up demands that the fuel should be paid for in rubles. Russia may expand the list of commodities for which it demands payment in rubles to include grain, oil, metals and others.

Meanwhile, as reported last night, BofA analysts echoed Goldman and warned that the 11% surge in U.S. stocks in the past two weeks has the hallmarks of a bear-market rally that might give way to deeper losses. Philadelphia Fed Bank President Patrick Harker said Tuesday he expects a series of “deliberate, methodical” rate increases this year, but said he is open to a half-point move in May if near-term data shows more inflation. Economic data releases Wednesday include U.S. GDP. 

“While the Fed faces considerable challenges in pulling off an economic soft landing, the central bank did manage to do so in 1965, 1984, and 1994; thus, we think it is too soon to write off their chances of doing so again, said Mark Haefele, chief investment officer at UBS Global Wealth Management. “We believe investors should brace for higher rates, without overreacting by neglecting areas of value in equity markets.”

Europe’s Stoxx 600 was down 0.6%, but traded off worst levels; sentiment was dented after Kremlin comments that there has been no breakthrough in Ukraine talks. Travel, retail and media names lag; energy and miners outperform. European stocks exposed to Russia and Ukraine slipped in early trading as optimism about a de-escalation of the war in Ukraine faded. The skepticism over Russia’s promise to scale back military operations in Ukraine has dented global stocks and boosted oil prices. Nokian Renkaat, which has a large factory near St. Petersburg, is down more than 7%, among top decliners on Stoxx 600. Here are some of the most notable premarket movers:

• Equinor, Shell, BP and other energy peers lead gains on the Stoxx 600, with the energy subindex its best performer, with basic resources gaining too: Glencore +2.5%, Boliden +4.7%
• Bachem rises as much as 4.1%, the best performer on the Stoxx 600 Health Care index, after Credit Suisse upgraded the company to outperform on its strength in peptides manufacturing
• Bloomsbury Publishing climbs as much as 8.8% after the company best known for the Harry Potter series said the new fantasy novel series ‘Crescent City’ had driven “exceptional” sales in February
• Encavis shares gain as much as 9.3% as Warburg sees an “upbeat outlook” that should “trigger earnings revisions,” after the company reported earnings late Tuesday
• Pearson shares fall as much as 11% after Apollo said it does not intend to make an offer for the firm after being unable to reach agreement over the terms with Pearson’s board
• Nokian Renkaat slides as much as 7.5% after JPMorgan and SEB cut their ratings for the Finnish tire maker due to its exposure to Russia, bringing its YTD loss to over 50%
• Other Russia-exposed peers also fall as optimism about a de-escalation of the war in Ukraine fades: Wizz Air drops as much as 5.5%, Faurecia as much as 7.5%
• Atlas Copco, SKF and Sandvik all fall after after reports emerged in Swedish media that its equipment and service contracts in Russia may have been been used by the military

Earlier in the session, Asian equities advanced for a second day as traders remained cautiously optimistic over Russia’s offer to scale back military operations in Ukraine. The MSCI Asia Pacific Index climbed as much as 0.9%, with Taiwan Semiconductor Manufacturing the biggest contributor following Micron’s strong forecast. Equities in mainland China outperformed, led by gains in brokerages and developers. Japanese stocks retreated as the yen strengthened. Inflation Trade Is Key to Everything in Global Markets Right Now Investors are hoping for a de-escalation in the war in Ukraine, though progress in cease fire talks has been met with some skepticism. Also on traders’ radar are Chinese firms’ earnings results and the risk of trading halts, and the impact from the yield-curve inversion in U.S. treasuries that are typically seen as a sign of future recession.

“With talk of de-escalation in Ukraine, volatility is easing off and that’s a positive for global equities – the benefits of which ought to flow through to an Asian region that’s very sensitive to the economic cycle and commodity prices,” said Kyle Rodda, analyst at IG Markets Ltd.  While the yield curve’s inversion is another factor to consider, a recession typically comes anywhere between 12 and 24 months following an inversion implying “there’s no major reason why sentiment can’t remain well supported,” he added. Elsewhere in Asia, stocks in Australia rose for a seven-day winning streak following a stimulatory federal budget package. China tech stocks traded in Hong Kong trimmed earlier advance amid fresh regulatory crackdown worries.  

Japanese equities fell as the yen strengthened amid concerns it had weakened too much. More than 1,500 Topix stocks traded without rights to the next dividend, shaving 22.4 points off the benchmark. Banks and automakers were the biggest drags the Topix, which fell 1.2%. KDDI and Tokyo Electron were the largest contributors to a 0.3% loss in the Nikkei 225. The yen strengthened 0.7% against the dollar, extending its 0.8% rally on Tuesday. The yen is still down more than 6% against the greenback since March 4 amid the Bank of Japan’s determination to continue easing. Perceived benefits of the weaker currency have helped boost the Nikkei 5.7% this month, its best since November 2020. “There’s much talk about the yen weakening further but it seems like it has gone too far,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management. The level of products exported from Japan is actually low, so “the image is a little different from reality.”

Australia’s stocks climbed, with the S&P/ASX 200 index rising 0.7% to close at 7,514.50, gaining for a seventh day, its longest win streak since December 2020.  The rally followed a stimulatory federal budget package unveiled late Tuesday. Hopes for talks between Russia and Ukraine also helped investor sentiment.  Life360 gained the most, rising for a second day, while Telix Pharmaceuticals led decliners. In New Zealand, the S&P/NZX 50 index rose 1.5% to 12,098.80.

In FX, the Bloomberg dollar spot index fell 0.4% as the greenback was steady to weaker against all its Group-of-10 peers; short-dated Treasury yields fell by around 4bps while longer dated ones were steady. European bonds slid, led by shorter maturities, as traders bet hotter-than-expected inflation readings will force the ECB to end its era of negative rates sooner than previously anticipated. Traders are wagering the ECB will raise its key interest rate to zero two months earlier than expected after Spain’s statistics service said EU-harmonized CPI jumped 9.8% from a year ago in March, topping all 15 estimates in a Bloomberg survey of economists. The yen outperformed all its G-10 peers as the options market signaled that a short-term top has been established in spot dollar-yen. The Bank of Japan ramped up efforts to rein in rising yields by offering to buy more debt across maturities. Bank of Japan Governor Haruhiko Kuroda gave another strong indication that the central bank will continue capping long-term bond yields after holding his first meeting with Prime Minister Fumio Kishida since the yen touched its lowest level since 2015

In rates, Treasuries were mixed with the curve steepening, pivoting around a little changed 7-year sector as 2s10s spread continues to widen away from the brief inversion that took place Tuesday. 2-year TSY yields are richer by ~3bp on the day while long-end of the curve cheapens almost 3bp — 2s10s spread steeper by 5bp; wides of the day more than 8bp. U.S. 10-year yields around 2.41%, with bunds and gilts trading 4bp and 1bp cheaper in the sector. Long-end Treasuries underperformed, cheaper on the day and following wider losses across bunds and gilts. Early gains in Asia spurred by Bank of Japan bond-buying operations, especially at long end of the curve which pushed Japanese government bond yields lower. IG dollar issuance slate includes three SOFR deals and a Misc Bhd 3Y/5Y; four issuers priced $5.1b Tuesday, takes weekly total to around $9b vs. $20b to $25b projected

European bonds slid, led by shorter maturities as traders bet higher inflation will force the European Central Bank to end its era of negative rates sooner than previously anticipated. German two-year yields, among the most sensitive to changes in the key policy rate, are on course for their first close above zero since 2014. The German curve bear-flattens, cheapening ~7bps across the short end. ECB-dated OIS rates point to a zero percent depo rate by the October meeting, red pack Euribor drops up to 9.5 ticks. USTs bull steepen, with 2y yields up 5bps. Gilts are comparatively quiet. Peripheral spreads tighten to core.

In commodities, crude futures advanced with WTI adding ~2% near $106.25. Base metals trade in the green; LME aluminum rises over 3%. Spot gold is little changed at $1,919/oz. European natural gas surges as much as 15% after Germany triggered an emergency plan to brace for a potential Russian gas cut-off.

Looking at the day ahead now, and data releases include German CPI for March and Italian PPI for February, whilst in the US there’s the ADP’s report of private payrolls for March and the third estimate of Q4 GDP. Otherwise, central bank speakers include ECB President Lagarde, and the ECB’s Holzmann, Wunsch, Makhlouf and Panetta, along with the Fed’s Barkin and George, and BoE Deputy Governor Broadbent.

Market Snapshot

• S&P 500 futures down 0.3% to 4,609.50
• STOXX Europe 600 down 0.7% to 458.63
• German 10Y yield little changed at 0.64%
• Euro up 0.4% to $1.1131
• Brent Futures up 1.8% to $112.22/bbl
• Gold spot up 0.2% to $1,922.70
•  
• U.S. Dollar Index down 0.41% to 98.00
• MXAP up 0.7% to 181.73
• MXAPJ up 1.3% to 595.64
• Nikkei down 0.8% to 28,027.25
• Topix down 1.2% to 1,967.60
• Hang Seng Index up 1.4% to 22,232.03
• Shanghai Composite up 2.0% to 3,266.60
• Sensex up 0.9% to 58,467.18
• Australia S&P/ASX 200 up 0.7% to 7,514.52
• Kospi up 0.2% to 2,746.74

Top Overnight News from Bloomberg

• Skeptical NATO allies are evaluating whether Russia’s promise to scale back military operations in Ukraine marks a turning point in the conflict or simply a tactical shift as attacks were still reported near Kyiv
• ECB President Christine Lagarde said Russia’s invasion poses “significant risks to growth” and has introduced “considerable uncertainty” into the economic outlook. At the same time, sticky energy costs, increasing food prices and persistent bottlenecks “are likely to take inflation higher,” she said
• The initial reaction to the prospect of a peace deal in Ukraine shows how the most important trades in markets are now all about inflation. Equities, Treasuries and the yen all rallied, underscoring how investing is being filtered through an inflation-driven prism rather than by a peace dividend, according to strategists
• In the third week of March, redemptions from China equity funds were the highest since early 2021, while outflows from Chinese bond funds exceeded $1 billion for the first time ever, according to data provider EPFR Global. That’s after regulators made promises this month to ensure policies are more transparent and predictable
• U.S. trade chief Katherine Tai said it’s time to forget about changing China’s behavior and instead take a more defensive posture toward the world’s second- biggest economy
• Germany triggered an emergency plan to brace for a potential Russian gas cut-off, as President Vladimir Putin steps up demands that the crucial fuel should be paid for in rubles
• Germany faces a “considerable risk” of lower output and possibly even a recession because of its high dependency on Russian energy, according to a panel of advisers to Chancellor Olaf Scholz. Even without a gas-supply shutoff, the Council of Economic Experts prediction is that gross domestic product will rise just 1.8% this year, down from a November projection of 4.6%
• BOE’s Broadbent sees an unprecedented external hit to the U.K.’s national income as Russia’s invasion of Ukraine “has led to substantial rises in the cost of energy and other commodities”
• India’s government is considering a proposal from Russia to use a system developed by the Russian central bank for bilateral payments, according to people with knowledge of the matter, as the Asian nation seeks to buy oil and weapons from the sanctions-hit country

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mostly positive amid optimism from Russia-Ukraine talks in which negotiators discussed a ceasefire and with Russia to scale down military activity in Kyiv and Chernihiv, although the US was unconvinced. ASX 200 gained on continued tech strength and with consumer stocks helped on Budget support measures. Nikkei 225 fell beneath the 28,000 level after weaker than expected Retail Sales and as the Yen nursed losses. Hang Seng and were underpinned after continued PBoC liquidity efforts and amid a deluge ofShanghai Comp. earnings including from large banks in which Bank of China and China Construction Bank both topped estimates

Top Asian News

• China’s Growth Outlook Worsens as Lockdown Fears Escalate
• U.S., India Officials Set to Hold Security Meetings in April
• Logan Unit Warns About Ability to Meet Bond-Repayment Demands
• China Tech Stocks Pare Gains After Reports on Online Video Curbs

European equities (Eurostoxx 50 -0.8%) are mostly lower as optimism from Ukraine/Russia updates yesterday fades and inflation concerns were further bolstered by regional German CPIs. FTSE 100 (+0.1%) remains afloat following gains in Energy and Basic Resources names

Top European News

• BOE’s Broadbent Sees Unprecented External Hit to National Income
• ECB’s Lagarde Says Costs of War Increase the Longer It Lasts
• Spanish Inflation Unexpectedly Soars to Almost 10% on War
• Citi Workers Stay Home as London Power Cut Disrupts Canary Wharf

In FX, Yen repatriation offsets BoJ yield intervention to keep recovery intact – Usd/Jpy extends sharp retreat to circa 121.31 from 125.10 on Monday. Euro inflated by significantly stronger than expected preliminary CPI prints and further EGB/UST yield convergence – Eur Usd takes out recent peak and probes Fib retracement in decent option expiry zone before fading around 1.1160.
Kiwi rebounds on strong building approvals and improvements in NBNZ survey readings – NzdUsd firmly above 0.6950 and AudNzd back under 1.0800. Dollar drifts ahead of ADP and more Fed commentary, with under 98.000.

In commodities, WTI and Brent have continued to pare back some of the aggressive selling pressure seen during yesterday’s
session. From a technical standpoint, May’22 WTI has made it back up to USD 107.30 vs. yesterday’s peak of USD 107.84, whilst June’22 Brent sits at 113.05 vs. yesterday’s peak of USD 114.83. US Energy Inventory Data (bbls): Crude -3.0mln (exp. -1.0mln), Gasoline -1.4mln (exp. -1.7mln), Distillate -0.2 (exp. -1.6mln), Cushing -1.1mln. US House Energy and Commerce Committee is to hold a hearing next week with six oil company executives regarding rising gas prices, according to Reuters. Germany declares “Early Warning” stage of gas supply emergency to prepare for possible escalation by Russia; says no current gas supply shortages. India is to increase natural gas prices for April-Sept to USD 6.10/mmbtu from USD 2.90mmbtu currently, according to Reuters sources.
Spot gold traded sideways and only marginally benefitted from the weaker greenback.

US Event Calendar

• 07:00: March MBA Mortgage Applications, prior -8.1%
• 08:15: March ADP Employment Change, est. 450,000, prior 475,000
• 08:30: 4Q PCE Core QoQ, est. 5.0%, prior 5.0%
• 08:30: 4Q GDP Price Index, est. 7.1%, prior 7.1%
• 08:30: 4Q Personal Consumption, est. 3.1%, prior 3.1%
• 08:30: 4Q GDP Annualized QoQ, est. 7.0%, prior 7.0%

DB’s Jim Reid concludes the overnight wrap

The last two times that the 2s10s first inverted during the cycle occurred when I was on holiday (August 22nd 2019 and way back on December 27th 2005). Proving that the yield curve is no respecter of my two-week holiday starting tomorrow, 2s10s teasingly dipped its toes into negative territory after Europe closed yesterday before discretely re-steepening into the US close (at 2.4bps). Nevertheless, the headline damage was done. The momentum has been toward flatter curves for a while, so this moment has felt inevitable even if it happened quicker than we expected. It is surely only a matter of time before we close inverted. I’ll likely be on holiday when it does so see you in a couple of weeks. First stop a diagnostic and steroid injection today in my back. Henry and Tim will be taking care of the EMR in my absence. First stop LEGOLAND and the Natural History Museum at the end of this week. The latter to see some dinosaurs that aren’t Daddy. See you on the other side.

Back to the curve and 2s10s has now flattened -75.0bps YTD, -17.4bps of which have come over the last two days amidst heightened bond market volatility, which showed no signs of calming yesterday with 2yr and 10yr Treasuries again trading in a wide range. 2yr yields were +12.3bps higher as New York walked in before finishing the day up +3.7bps, while 10yr yields went from +7.4bps higher early in the day to as low as -8.2bps, before closing down -6.4bps. US yields are another -5 to -6bps lower in Asia as I type so 15 to 20bps off the highs 18 hours ago. Yields hit their intraday peaks at this point alongside the peak in optimism around potential peace talks covered in more detail below.

Having said that there were other important bond milestones yesterday. 2yr German debt moved into positive territory in trading for the first time since 2014, although by the close it was “only” up +6.2bps at -0.07%. Note German inflation is coming out later today and the NRW region has just come out at a very high 7.6% which likely means the 6.2% national average expected is going to be beaten. So maybe more grounds for bond volatility today. Also Italian PPI is out. Remember last month this hit an astonishing 41.8% YoY.

This all comes as the Ukraine developments yesterday led to growing conviction that the ECB would commence liftoff in its policy rates this calendar year, and the amount of ECB tightening priced for 2022 went all the way up to +62.1bps by the close, surpassing their previous peak prior to the invasion. At the same time, yields on 10yr bunds (+5.3bps), OATs (+4.9bps) and BTPs (+0.9bps) all hit multi-year highs of their own even if 10yr bunds closed at 0.63, -10bps below its intraday highs of 0.73%.

As discussed near the top, the last leg of the global yield spike higher came as peace hopes exploded in the middle of the European session. However the spike in nominal yields was very short lived as commodities fell back following the positive news, dragging breakevens down with them. This followed some of the most optimistic headlines we’ve seen since the conflict began. In particular, Russia said it would “dramatically reduce” its military operations around Kyiv, and their chief negotiator Vladimir Medinsky said that Ukraine’s proposals would be passed onto President Putin for a response. Meanwhile Ukraine’s negotiator Mykhailo Podolyak said that the agreement offered would see both sides “resolve issues linked to Crimea and the city of Sevastopol though bilateral negotiations”, which Russia has occupied since 2014. So although it’s worth pointing out that we don’t even have a ceasefire yet, the fact that both sides might be edging closer towards one another has seen markets reduce the perceived likelihood of further escalation scenarios. The alternative view is that the Russians are simply diverting resources to other areas and this is purely tactical. So it’s still a long way from being over but the tail risks seem to be reducing.

This growing optimism was evident across multiple asset classes, with European equities moving back up to levels not seen since the conflict began. Indeed, the STOXX 600 (+1.74%) closed at its highest level since February 17, having now recovered by +13.85% since its closing low just 3 weeks earlier. The S&P 500 (+1.23%) also advanced, which reduced its YTD losses to just -2.82%, whilst the NASDAQ was up +1.84%. While fixed income volatility has taken off, equity volatility continues to fall as indices rally and risk sentiment improves. The VIX fell another -0.73ppts yesterday to 18.9ppts, having fallen 13 of the last 16 days after reaching its highest level in over a year earlier in the month.

Oil prices had a significant reaction as well, with Brent Crude falling by about $10/bbl between its intraday high and low just a couple of hours apart, before settling -0.94% lower at $111.42/bbl. And the euro itself strengthened by +0.92% to move just shy of $1.11.

When it comes to the Fed, the added optimism did not do much to alter pricing this year, as it seems markets have already internalised that the Fed is now less inclined to let war get in the way of the hiking cycle. Expectations for a 50bp hike at the May meeting remain high, having oscillated between 65% and 80% since last Monday, finishing yesterday near the upper end of that range at 75%. The only speaker of note was Philadelphia Fed President Harker, who said that he wouldn’t take 50bps off the table for May, but expected “a series of deliberate, methodical hikes as the year continues”. The jobs report on Friday as well as the CPI report on April 12 will be very important ahead of the Fed’s decision in early May.

Asian stock markets are mostly trading in positive territory. The Hang Seng (+1.15%) is up after shares of Chinese tech giant Tencent rose more than +2%. Meanwhile, shares of China Evergrande Group will “remain suspended until further notice” as per yesterday’s announcement by the firm. Chinese stocks opened higher with the Shanghai Composite (+1.28%) and CSI (+1.40%) leading gains across the region. Elsewhere, the Kospi (+0.25%) is trading up, building on gains in the previous session. Bucking the trend is the Nikkei (-1.27%) after giving up its earlier session gains as the Japanese Yen strengthened (~1.0%) against the US Dollar. Data showed that Japan’s retail sales (-0.8% m/m) fell for the third straight month in February, exceeding market expectations for a -0.3% loss and after falling -0.9% last month. Moving on, the S&P 500 (-0.12%), Nasdaq (-0.11%) and DAX (-0.15%) futures are all slightly down.

On the data side yesterday, there were a number of interesting releases from the US, which collectively pointed to inflationary pressures still in the pipeline. In particular, the total number of job openings in February came in at 11.266m (vs. 11m expected), which means that the number of job openings per unemployed moved back up to its second highest ever level, at 1.80 openings per unemployed person. Furthermore, the quits rate also ticked back up to 2.9%, just shy of its record 3.0% back in November and December. Otherwise, the FHFA house price index was up +1.6% in January (vs. +1.2% expected), and that was the fastest monthly gain in 7 months. Meanwhile, the Conference Board’s consumer confidence measure ticked up slightly to 107.2 (vs. 107.0 expected), but there was a growing divergence between the present situation reading, which rose to 153.0, unlike the expectations measure at 76.6, which hit its lowest level since February 2014.

To the day ahead now, and data releases include German CPI for March and Italian PPI for February, whilst in the US there’s the ADP’s report of private payrolls for March and the third estimate of Q4 GDP. Otherwise, central bank speakers include ECB President Lagarde, and the ECB’s Holzmann, Wunsch, Makhlouf and Panetta, along with the Fed’s Barkin and George, and BoE Deputy Governor Broadbent.

Russian attacks and shelling have reportedly continued near Kiev and the Chernihiv, following Tuesday’s Kremlin declaration that it would draw down some units in these areas coming off negotiations with Ukraine in Istanbul, something met with skepticism by NATO and the Pentagon.

The Kremlin further cited “no breakthroughs” from the talks after a draft ceasefire deal was said to be on the table, and amid generally positive international headlines and market reaction. A statement said additionally that “much work remains”. The US had called observed troop removals near Kiev a tactical redeployment and not in truth de-escalation. 

According to Bloomberg citing a Russian source: “De-escalation does not mean a cease-fire or complete withdrawal of troops from around Kyiv, said a person close to the Kremlin.” The report says further, “Moscow’s likely war goals now are to take two eastern provinces, together with a land corridor from the Russian border to the Crimean peninsula, which Russia annexed in 2014, the person said.”

Speaking of Crimea, the Ukrainian delegation for the first time offered to speak about this in negotiations, but in a further complication for any final ceasefire, the Russians have shut the door on this as a key bargaining element.

“Crimea is part of the Russian Federation. And in line with our constitution we cannot discuss the future of the territory of the Russian Federation, the future of Russian regions. This is out of the question,” Kremlin spokesman Peskov clarified Wednesday.

“It is positive that the Ukrainian side has at least begun to formulate concretely and put down on paper what it proposes,” Peskov described of Tuesday’s Turkey-sponsored negotiations. “As for the rest, we cannot yet state anything promising, no breakthroughs. Lots of work ahead.”

Meanwhile, on the ground it doesn’t appear any major changes in Russian military posture have been effected, with the major northern city of Chernihiv coming under “colossal attack” overnight and into Wednesday, according to the words of the mayor, as CNN details:

His words came as it emerged that the city was “under fire” from Russian airstrikes while shelling continued through the night, according to Viacheslav Chaus, head of the Chernihiv regional administration. 

In an interview with New Day’s John Berman, the city’s mayor Vladyslav Atroshenko hit out at Russia’s claim on Tuesday that it planned to “drastically reduce” its military assault on Chernihiv and the Ukrainian capital Kyiv.

The General Staff of the Armed Forces of Ukraine has also confirmed that it’s witnessing what it called a “regrouping” and not a withdrawal.

Russian UAV footage showing Russian strikes on Ukrainian tanks and artillery, presumably with Krasnopol rounds. https://t.co/m3WFVsDScm pic.twitter.com/1BS71Q2emU

— Rob Lee (@RALee85) March 29, 2022

“According to some indications, the Russian enemy is regrouping units to focus its main efforts on the east. At the same time, the so-called ‘withdrawal of troops’ is probably a rotation of individual units and aims to mislead” the military said in a Facebook post.

And more, pertaining to ongoing fighting around Kiev:

“After their statements yesterday nothing has changed at all,” Maryan Zablotskyy, a member of the Ukrainian parliament who got his wife and child out of Kyiv, told Fox News Digital. “Fighting [continued] all through the night around Kyiv.”

“They are forced to retreat from different areas around Kyiv,” Zablotskyy noted, “but only if they are successfully pushed back.”

1/ Big Arrow War—a primer. For all those scratching their heads in confusion, or dusting off their dress uniforms for the Ukrainian victory parade in Kiev, over the news about Russia’s “strategic shift”, you might want to re-familiarize yourself with basic military concepts.

— Scott Ritter (@RealScottRitter) March 29, 2022

Additionally Bloomberg has cited a Moscow-based military analyst and consultant, Evgeny Minchenko, who points out, “I think there was very serious misunderstanding of what both sides said in Istanbul after the talks.” He added: “So far I just heard is that there will be less action near Kyiv and Chernihiv, because the Russian army is concentrating its resources against the Ukrainian army in Donbas.”