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Bonds On The Move As Powell Signals Inflation Warning

Published 22/03/2022, 09:51
Updated 25/12/2023, 10:05

Bond markets are on the move as the US 10-yr jumped north of 2.3%, though stock markets are not looking too bothered right now. European bourses trade mildly higher this morning after a soft session in the US and mixed bag from Asia overnight. Banks, autos, insurance are leading the Stoxx 600, with healthcare the only sector in the red. Oil and gas stocks towards the lower end as oil prices lurched lower in early trade – Brent dropping from a high above $119 to a $114 handle in fairly short order. Unclear the reason, underlines the volatility and illiquidity in the market right now...open interest in WTI is at its lowest in seven years.

Fed chair Jay Powell sounded the alarm on inflation, saying it’s ‘much too high’ and opening the door to more aggressive rate hikes. “We will take the necessary steps to ensure a return to price stability,” he said. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

The Fed seems to be converging on an idea: The Fed’s Bostic said he’s "not wedded to moving only 25", while fellow policymaker Barkin said he’s "very open to half-point moves". Another policymaker, Waller, said "the data is basically screaming at us to go 50", and probably the most hawkish on the committee, James Bullard, said, "50 [bps hike]... would have been a better decision". The Fed is suddenly worried about the inflation that’s been building pressure for well over a year. Strong sense that they are out to crush inflation and hiking is going to accelerate. Last Thursday I noted that US 10s could jump to 2.5% quite quickly and we are well on our way to that already.

With all this Fed talk you have to look worryingly at growth stocks. ARK Innovation ETF (NYSE:ARKK) fell almost 3% and NDX is not shaking the bear trend. The bubble is pricked.

Ahead of the Spring Statement tomorrow, GBPUSD continues to trade around 1.3160, the old zone of support from Dec ‘21. CFTC data showed net bearish bets on the pound rose by $1.3 billion to $2.6 billion, highest since the start of the year. UK gilt yields have risen to their highest in three years as global bond markets continued to sell off. Any war premium for bonds has been removed by the hawkishness of the Fed.

GBP/USD Daily Chart

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