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Markets:
- Gold down $10 to $1922
- US 10-year yields down 15 bps to 2.56%
- WTI crude oil down $2.87 to $100.44
- S&P 500 down 58 points to 4523
- AUD leads, JPY lags
The mode in markets was selling the US dollar while buying commodity currencies early in US trading. The Aussie, kiwi and loonie all made a run for it with USD/CAD down to the lowest since November. Equities opened flat-ish and the moves in bonds were modest. The ISM non-manufacturing report pointed to a strong economy with a pickup in services orders and inflationary pressures compounded by difficult supply chains.
Then Brainard spoke and the market flipped.
She said “the Committee is prepared to take stronger action if indicators of
inflation and inflation expectations indicate that such action is
warranted” and spoke about trimming the balance sheet aggressively.
The conditionality of her comments were lost as was the less-enthusiastic talk about 50 bps from the Fed’s George, who is a hawk. What the market focused on was that the Fed vice-chair, who is a noted dove, opened the door to 50 bps. The pricing for it rose and Treasury yields broke through recent highs.
With that the dollar unwound its losses and more. The euro and pound were particularly hard hit as those central banks will have a tough time keeping pace with the Fed. The pound continues to be tightly tied to risk assets as well; it tracked the drop in US stocks closely.
USD/JPY rose 80 pips in another broad yen rout. The pair is flirting with its highest close of the year but still has more than 100 pips to go until the March intraday high.
Looking ahead, China continues to report record covid cases and that could further sap the risk mood as the late-March momentum evaporates. The dollar is also threatening another leg higher versus the euro and yen, among others.