Through The Flames

The market narrative continued to revolve almost exclusively around the Fed on Tuesday, as traders digested Jerome Powell’s hawkish speech to the NABE.

Early on, there was some extension of the bear flattening impulse following Monday’s front-end selloff, which counted among the largest routs in a decade. By the end of the US session, the curve was steeper with yields cheaper by up to 9bps. Markets are now pricing in almost two 25bps cuts between June of next year and year-end 2024. That doesn’t sound like a soft landing, nor would it likely count as “soft-ish” (to employ Powell’s characterization from Monday’s remarks) depending on the prevailing macro circumstances.

Aussie bonds sold off in sympathy Tuesday, with three-year yields jumping some 19bps (figure below). Philip Lowe continues to stick (very) stubbornly to a script he’s changed only gradually and begrudgingly. “I think it’s quite unlikely we get stuck in a world of persistently high inflation,” he remarked, during a journalism awards ceremony. Markets are pricing in ~80% odds of an RBA hike in May. In New Zealand, two-year yields jumped some 15bps.

Commentary on the Fed had an air of finality. This time, “tightening means tightening,” someone remarked. “If nominal yields that look like they belong to the pre-pandemic era are the objective, why not talk up expectations?”, Bloomberg’s Ven Ram wondered.

“We think the odds of a 50bps rate hike are rising,” UBS’s Jonathan Pingle wrote, on the way to suggesting the Fed would be happy to take whatever the market is willing to give the Committee. “If bond markets price in the vast majority of a 50bps rate increase with little negative spillover to other markets, we believe that would factor importantly into the Committee’s decision over whether to raise rates by 25 or 50 at the May meeting,” the bank said.

For what it’s worth, Treasurys are now on pace for what looks like their worst quarter ever, or at least in data going back four decades. At almost 6%, the Q1 decline is set to eclipse a 5.5% drop witnessed in 1980.

In Europe, the ECB’s Luis de Guindos was blunt during a virtual event. “Inflation that was on the rise previously now will be higher for longer,” he said, albeit while sticking to a constructive assessment of the bloc’s economy, which is still expected to grow, depending, of course, on whose expectations you reference.

“We can so far dismiss the possibility of stagflation,” de Guindos suggested. He did say the ECB needed to be attentive to the “possibility” that inflation expectations could become de-anchored.

Meanwhile, UkrAgroConsult said Ukraine’s capacity to export crops is now “8-10 times less” than normal. It would take around three weeks for the country to restore pre-invasion export levels through seaports following a hypothetical cessation of hostilities. Corn plantings could be 29% lower YoY, sunflower area nearly 50% lower, barley 29% down and wheat 11%. “Even after the war ends, it will take some time to eliminate the consequences,” UkrAgroConsult said, in a note.

The Kremlin on Tuesday called peace talks “slower” and “less substantive” than hoped. Volodymyr Zelenskiy turned to God, suggesting the Pope should intervene. And, in Moscow, a judge found Alexey Navalny guilty of “major fraud.”