The market is still trying to digest the Fed decision and that was followed up by no change from the BOJ and then -- just as USD/JPY broke out -- a round of intervention. The SNB then hiked less than feared and to cap it off we got the BOE decision, which was 50 bps and not the 75 bps that markets had priced in.
That's a lot to unpack and we're still trying to understand what's happening with Russian mobilization.
In terms of markets, bonds are dumping again today, right across the curve. That leans against the bid in the long-end yesterday, that I think highlighted recession risks. I'll quote at length from the bond team at BMO, because this resonates:
Given that the Fed delivered a hawkish hike, why then did the long end of the curve rally on an outright basis? The deeper inversion is certainly consistent with the Fed’s more aggressive stance and the potential fallout for the real economy; it’s the drift lower in rates that is somewhat counterintuitive. Our read is two-fold. First, the market didn’t trade Putin’s escalation of his war with Ukraine and the west in real time – suggesting we’re seeing a delayed response that has the potential to bring longer dated yields lower and deeper into the prevailing range. Second, this year has been spent with investors playing catch-up with the Fed’s ever-increasing hawkishness. Today was the first time the market was relatively well-prepared for the Committee’s response to August’s higher-than-expected core-CPI print. Said differently, investors recalibrated Fed expectations appropriately; demonstrating an accurate understanding of the Fed’s reaction function to core consumer prices for the first time this cycle. As a result, investors are comfortable ‘moving on’ to trade the next narrative – i.e. the looming energy crisis, global recession, and geopolitical unknowns.
But that bid is gone today which could be a sign of apprehension or something else. We get a 10-year TIPS auciton today and that could be instructive on both bond demand and inflation expectations.
In the last hour, there's been a renewed bid in oil as well, climbing $3.
What's the trade? I can think of a few but at a time like this do you really need to make a trade?
I could make a case for any of these as the next big trade:
- Soft landing
- FX manipulation/Dollar bull market
- Something breaking in the financial system
- The energy crisis/commodities
- Stubborn inflation
When it comes down to it, I have to come back to the data. US claims were good again today and that's a solid real-time indicator. Bill Gross once said if he only had one economic indicator, that would be it.Tomorrow we get German IFO data and US consumer confidence.
So wait for more data?
In any case, if you're head isn't spinning here, you're not paying attention.