The macro backdrop remains very choppy with equity and FX markets on the defensive amid further weakness in tech and a well-supported USD. Although the Fed’s balance sheet’s run-off flagged in the FOMC minutes was not especially different from market expectations, uncertainty around central bank reaction functions remains high.

Policy challenges vary wildly by economy/region. The Fed is prioritizing beating inflation over supporting growth. US inflation breakevens remain elevated suggesting that either the combination of rate hikes and balance sheet run-off already priced is insufficient or that structural factors mean that the central bank will have a limited impact on inflation.

The policy challenge and response for the eurozone and China are more straightforward.

The ECB has stressed not overreacting to higher inflation in recent days (i.e. comments from Fabio Panetta and Philip Lane), while in China, where CPI inflation is much lower, the PBoC and the government have scope to cut interest rates and incentivize consumer spending via fiscal transfers to alleviate the costs of the country’s zero Covid strategies.
These policy differences imply EUR and CNH underperformance vs the USD.

From Stephen Innes, Managing Partner at SPI Asset Management