US equities were stronger Tuesday, S&P up 1.1%. Bonds sold off again: US10yr yields up another 9bps to 2.38%, 2yrs up 4bps to 2.16%. Oil little changed. ( At New York Close)

A beat on Richmond Fed manufacturing, up 12pts to +13 in March, consistent with the more robust Philly Fed print last week, suggesting the significant drop in NY might have been an outlier.

And let’s not forget the battle of the yield curve goes on as it’s out with the old in with the new regime with Chair Powell dismissive of the recession signalling power from the 2s10s curve; preferring the spread between the 18m forward 3m yield and the 3m yield which is positively outperforming the old guard 2s10s.

After Monday’s stagflation-fueled mild weakness, equities are rallying. They have held their gains despite Treasuries selling off with the 10y yield above 2.40%, but the curve is holding up better versus Monday’s continuous flattening, and the general tilt to the tape is “risk- on.”


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The resilience of equity markets chimes with credit markets, where US IG returns are outperforming USTs by 1.7pp over the past week. The sanguine response of credit and equity could change if rates volatility – a key metric to watch – steps back up towards early March levels.

Given the high macro uncertainty, investors are likely shifting their investments into stocks providing a higher level of predictability. High quality, growth, and momentum tend to outperform periods of unexpectedly high inflation.

However, yesterday’s price action seems not only trading a theme of Fed hike path repricing but also a higher probability of a deal in Ukraine.

Ukrainian President Zelensky said late Monday he would consider dropping Ukraine’s requests for full NATO membership – a critical Russian demand – in exchange for a cease-fire, the withdrawal of Russian troops and security guarantees.


Oil prices initially surged yesterday as hopes for a cease-fire in Ukraine dwindled, and the EU continued to discuss a Russian oil embargo.

Germany’s current opposition to a Russian Oil embargo remains an obstacle which probably means there will be no short-term change in the status quo.

European foreign ministers met yesterday but appeared to be split on the issue. German Foreign Minister Annalena Baerbock said the EU could not cut itself off from Russian oil and gas and should focus on reducing its reliance on Russian energy exports.

It appears unlikely current sanctions will ease anytime soon, even during a cease-fire, with US and UK implementing a hard ban.

Still, with few levers remaining to pressure Russia short of military intervention, the market is beginning to price in the loss of a significant amount of Russian oil needing to be backfilled.

It could take years for Russian oil markets to normalize, if ever.

Meanwhile, the big elephant in the room is the US President, joining the NATO meeting and EU Summit this Thursday in Europe. Sanctions and the Russian oil embargo will be the headliners.

While anti-Putin backlash runs deep in Germany, policymakers can’t take the chance of an economic implosion by turning off the Russian oil pump.


Gold is holding up well despite the hawkish Fed tones, but it is also weaker via the inflation channel, with oil prices settling lower. Still, the Ukraine -Russia war provides downside support which could ultimately support dips to $1900 until Putin agrees to withdraw troops from Ukraine.

>From the rates channel perspective, this is typically a scenario where I would have priced in a move to $1850. However, there remains a lot of war risk premium. Also, there is still a lot of uncertainty about whether the EU will embargo Russian oil and send inflation on the Continent and possibly worldwide into double digits.

I would not own a lot of speculative paper gold here. However, bullion is still a viable inflation hedge, especially in this current environment until it isn’t, and that is when the fighting stops.


More aggressive monetary policy matters for equity and credit markets if economic growth slows sharply, which could trigger higher rates vol and a broader cross-asset fallout. In the meantime, a sharp recovery in EM and European equities keep the USD on the back foot, negating the positive USD factor of higher US real yields.

Also, Fed rate hikes will not happen in a vacuum. While the dollar strengthened via the rate hike channel early yesterday, the bubbly risk on sentiment supported by anticipated higher global GDP’s helped the currency market stabilize and eventually shifted higher via the Fed rate hike spillover effect channels, which triggered higher yields across G-10 markets.

Perhaps outside of the BoJ, although I don’t think the normalizing story entirely left the picture despite Kuroda’s dovish pledge to parliament yesterday, other central banks will be more emboldened to put on their inflation-fighting hats and move interest rates higher and even faster to support a stronger currency to stave of importing inflation.


Just as USDJPY started to reconnect with US rates, USDJPY was given a “KaPowell” f cutting through 120 like a hot knife through butter as traders were emboldened by a lack of official push back Yen’s strength. Models continued to buy USDJPY overnight, keeping the pair near new record heights. And again this morning, there was strong USDJPY demand at the Tokyo Fix with US Bond yields doing another ripper this morning in Asia.

And while my BoJ push-back thesis was deal wrong, at least for now, the Yen’s cause was not helped by Japan’s Minister of Economy, Trade and Industry Hagiuda warning that the country is facing potential power blackouts. That is scary stuff !!

I’m highly conflicted on this trade as I see reasons to fade USDJPY strength, but it’s not clear they will matter just yet. Valuations are incredibly cheap – the real TWI has never been this low. Positioning remains relatively short. There’s also an emerging inflation story, with the chance of a BoJ shift in Q2.

From Stephen Innes Managing Partner at SPI Asset Management