Overnight Headlines

*Inflation likely to push Fed to raise rates on Wednesday by 75bps

*Asian stocks slide as Wall Street tips into a bear market

*Beijing Covid cases in three-week high as virus czar urges action

US equities continued to decline with risk-off sentiment broadening. The S&P500 slumped -3.88% to close at 3749, its lowest level since March 2021. The Nasdaq dropped -4.6% and the Dow tumbled more than 800 points. The sell-off was more widespread than last week’s activity as a sharp jump in yields dictated sector performance. That meant financials and staples held up better, while energy sold off the most. US futures are in the green, up over 1%.

USD rose to a fresh near-20-year high on Monday, posting a new top at 105.28. EUR traded below 1.04 before finding a small bid this morning. GBP printed a new cycle low at 1.2106 before pushing up above the previous y-t-d bottom at 1.2155. EUR/GBP moved above 0.8590 before paring its gains. Risk-off sentiment saw USD/JPY initially fall to 133.60 before bouncing above 134.50. AUD crashed through 0.70 while USD/CAD rose to 1.2890.

Market Thoughts – All change for the FOMC

Wow, a few hours are a long time in financial markets. We mentioned that two bigger 50bps rate hikes were nailed on for this week’s Fed meeting in yesterday’s webinar. But this has now all changed after several US media outlets guided markets towards the likelihood of a 75bp hike. There is now also a 75% chance of another 75bp rate increase at its July meeting. The end rate (“terminal rate”) for Fed funds futures is nearly 4%. A week ago, this rate was less than 3%.

This has seen bond yields rise dramatically. The long-term downtrend in yields on the US 10-year Treasury looks to have been broken, as its almost certain to rise for two straight quarters. Real yields are now positive by 0.7% after dropping below -1% in early March. This should give solid downside protection for the dollar short-term as other central banks, including the ECB, still have work to do to match the Fed’s credibility on inflation.

Chart of the Day –Fed Funds chart says it all

One of the more stunning days in bond markets, which caused huge turbulence in stocks and risky assets. The S&P500 dipped into bear market territory, falling more than 21% from its January record high. The Nasdaq is off around 33% from its November top. Bitcoin has tumbled 20% since last Friday.

This has all been driven by last week’s red-hot inflation data and subsequent moves in rate hike expectations. There is little chance of the Fed pivoting to support markets until there is a trend of meaningful economic disappointments. The size of the move in Fed pricing can be seen in the matrix below this bar chart which is taken from the CME FedWatch tool. There was a 3.9% chance of a 75bp rate hike at this week’s Fed meeting one week ago. It is now a given at 95.5%.