Summary and Price Action Rundown
Global risk assets are moderately lower this morning as the US and EU add to their sanctions regimes against Russia and more central banks pivot to a tighter stance. S&P 500 futures indicate a 0.3% lower open after the index advanced 0.8% yesterday, paring year-to-date losses to 3.9%, while the Nasdaq outperformed on notable tech stock news to improve 2022 performance to -7.1% thus far. EU equities are retracting some recent gains, while Asian stocks were mixed overnight. Longer-dated Treasury yields are moving higher after their recent slide, which has featured an inversion of the closely-watched 2-year/10-year segment of the yield curve, a traditional signal of impending recession. The 10-year Treasury yield is climbing back to 2.47%, which is slightly below the 2-year yield. The broad dollar index is holding steady below its recent 2022 peak, which was its strongest level since July 2020. Oil prices are extending yesterday’s rebound, with Brent crude climbing back above $108 per barrel amid tightening US and EU sanctions on Russia.
Central Banks Tilt More Hawkish in the Face of Persistent Price Pressures
The Reserve Bank of Australia (RBA) held policy steady but signaled a pivot toward interest rate hikes at upcoming meetings, while the Bank of Japan (BoJ) is reportedly set to jawbone against yen weakness. Though the RBA maintained its policy rate at 0.10%, it dropped language in the accompanying statement suggesting a wait-and-see posture and indicated that rate hikes could begin over the summer. Analysts are focused on the June meeting as the timing for liftoff, but May could be on the table. Governor Lowe noted that “additional evidence will be available… on both inflation and the evolution of labor costs” in the coming months, implying that no decision has been made, but flagged that there are already “some areas where larger wage increases are occurring.” This represents a pivot from the determinedly dovish policy stance of the RBA, and brings it closer to alignment with the Fed, as futures markets are pricing in seven to eight 25 basis point rate increases for the RBA though year end versus eight to nine more for the Fed after liftoff last month. The Australian dollar is 1.2% stronger versus its US counterpart this morning, extending the comeback of the currency to its strongest point since June of last year. Rising commodity prices have helped bolster the Australian dollar versus its developed market peers, with its 5.1% year-to-date appreciation the strongest by far in the G-10.
Meanwhile, BoJ Governor Kuroda overnight remarked that recent moves in the yen had been “somewhat rapid,” though this gentle jawboning did little to hoist Japan’s flagging currency overnight. For context, the yen has weakened 6.4% versus the dollar this year amid a widening monetary policy divergence as the BoJ has maintained its ultra-dovish settings and even augmented its bond buying in recent weeks to tame the upside in the 10-year Japanese government bond yield. These bond market interventions, in particular, have exerted significant pressure on the yen versus the dollar. – MPP view: We expect that increasingly hawkish and urgent rate hikes by the Fed will keep the divergence from the RBA, ECB, and BoJ relatively wide, keeping the dollar supported and tightening global financial conditions.
Prospect of Tighter Sanctions Amid Russian Atrocities in Ukraine
With the news conveying evidence of war crimes discovered in the wake of retreating Russian forces in Ukraine, western leaders are preparing to expand their sanctions against Russia. Specifically, the White House is now blocking use of US banks to make dollar payments on Russian bonds, a move that is intended to force the Kremlin to drain domestically-held dollar reserves. Additional sanctions are reportedly in the works. For its part, the EU is reportedly debating imposition of a ban on coal, wood, chemicals and other imports from Russia, semiconductor and other high-tech exports to Russia, prohibitions on Russian use of EU transportation infrastructure, and further measures against Russian oligarchs, politicians, and military members and their families. Tighter prohibitions against transactions with Russian banks are also said to be on the table. – MPP view: Our base case is that the US administration policy is to force Russia into sovereign default, if possible. Meanwhile, the EU has come further and faster than many had expected on Russia sanctions, and we had not anticipated that a full oil embargo would yet be in the cards, nor do we think Russia will cut off EU gas if they don’t pay in rubles. But with the conflict grinding on and potentially turning even more grim (chemical weapons, further atrocities), the embargo will probably be revisited.
Supply Chain Pressures in Focus – The latest reading of the Logistics Managers’ Index, which is compiled by five US universities and published by Colorado State, registered a record degree of pressure, hitting 76.2 for March after posting 75.2 in February. The New York Fed’s newly created supply chain showed a modest improvement in February but is also expected to reflect re-intensifying frictions in March amid reverberations from China’s COVID containment lockdown and Russia’s invasion of Ukraine. – MPP view: For additional color on the state of logistics bottlenecks, please see Sunday’s latest edition of the Skyline Supply Chain Risk Radar
SEC Chief Discusses Crypto Regulation – SEC Chair Gary Gensler said in a speech at the Penn Law Capital Markets Association’s annual conference that the SEC is pursuing several initiatives to better regulate cryptocurrency markets and protect investors, signaling a new era of oversight in what is now a $2 trillion market that has been riddled with scams and extreme volatility. “Any token that is a security must play by the same market integrity rulebook as other securities under our laws,” Gensler said. “There’s no reason to treat the crypto market differently just because different technology is used… We already have robust ways to protect investors trading on platforms. We ought to apply these same protections in the crypto markets.” Specifically, Gensler said the SEC will work to make sure “issuers of crypto tokens that are securities… register their offers and sales of these assets with the SEC and comply with [its] disclosure requirements,” and will explore whether crypto platforms should be treated like traditional retail exchanges. Additionally, Gensler said the SEC will collaborate with the Commodity Futures Trading Commission to oversee platforms that trade both crypto-based security tokens and commodity tokens and will take steps to regulate the $183 billion stablecoin market, which he said has raised concerns over potential conflicts of interest within crypto platforms that own large quantities of stablecoins and the potential use of stablecoins to facilitate illegal activity. – MPP view: Consumer protection in crypto is a key policy goal of this administration, but the fragmented interplay between agencies and Congress means a patchwork approach will remain in place. We continue to think that the US legislative process has little chance of producing a comprehensive bill that meaningfully confronts this issue, but we are watching the potential for stablecoin regulation more closely – this is still likely to be a post-midterm agenda item.