Rising jobless claims, softer home sales, and a buildup in gasoline inventory all show the Fed front-loading rate hikes are causing demand destruction. Though it may take a couple of quarters for core CPI items, like rents, to decline, chances of a lower terminal rate are rising.

As UMich and NY Fed inflation expectations have pulled back and 5y5y breaks are stable, the Fed should next week continue to hike 75bp and reiterate its data-dependent mode, and odds are increasing for a softer Fed rate hike profile.

The massive rally in US Treasuries happened at the same time as the ECB meeting on Thursday, with yields moving down almost 20bp. However, the trigger is not so much by ECB, and it’s more to do with the Philadelphia Fed Business Outlook. The number was feeble at almost 10-year lows before the pandemic.

The reading on initial jobless claims was also a concern as investors have seen three weeks of back-to-back increases. The final nail will be the US PMI on Friday. If US PMI goes under 50, it will make a strong case for recession fears ahead of the Fed meeting next week.

While structural headwinds are gusty for the yen, setting a fundamental background for the currency to stay weak. Yet a recessionary environment is a cyclical blessing – lower global growth and US rates consistently prove that the JPY is among the cleanest and easiest hedges to ride out the gloom of recessionary doom. And despite Kuroda’s dovish rhetoric, Japanese consumers don’t want a weak Yen.


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Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT