Bassanese Bites: Faster is better – March 28 2022

Global markets

There continues to be a strange divergence in global financial markets. Global bond yields surged further last week as strong U.S. economic data and hawkish Fed rhetoric saw bond markets almost fully price in a 0.5% rate hike at the May Fed meeting – in line with my base case outlined last week. Fed chair Powell suggested he’ll do what it takes to get inflation under control, while the Fed’s Bullard said “faster was better” when it comes to getting interest rates at least back up to neutral. The Fed seems to be hoping that aggressive early rate hikes could tame inflation while avoiding a hard landing or recession, as evident in 1994.

The equity market meanwhile continues to rejoice at strong U.S. economic data – the February services and manufacturing indices were both stronger than expected, and weekly jobless claims dropped to their lowest level since 1969! Indeed, equities of late have become blithely untroubled by the surge in interest rates, with U.S. 10-year yields blowing though my 2.25% target to end last week at 2.48%. Equity investors are betting on a soft landing, or at least remain confident the Fed will backtrack at the first signs of economic weakness – even if inflation remains uncomfortably high.

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