Outlook: We get a ton of data this week, including GDP for the US and eurozone at the end of the week. The stock market may be influenced by the latest information from the University of Michigan April consumer sentiment index. Again we have to quarrel with this data as important and meaningful–it’s based on a mere 500 telephone calls. The surveyed are asked 50 questions. Who has the patience for that? Retired people. They may be older and wiser, but they may also have rock-hard bias, too. For evaluating the inflation trend, we’d guess a more important number would be the NY Fed’s supply chain pressure index (GSCPI). The most recent one is dated March 3 and good luck finding the date of the next release–a search of the site got 6930 articles (or 12,238 using other search terms). As of the March report, the reading is “pressure still high but falling.” The risk of recession is not zero, of course, but panic is also not called for–at least, not yet. You don’t get stagflation without stagnation and so far we see fairly robust and resilient economic activity in the US. If we had to choose a single bit of data to demonstrate good demand and a good mood, let’s watch sales of the Ford F-150 EV truck this week. It’s the best-selling vehicle of all time and has tremendous features (re-charge tools, power your house in a blackout), plus it’s a symbol of the great masses accepting electric vehicles, not quite the same thing as accepting climate change but a lot more than the elite buying Teslas. Markets are under-weighting two economic factors, the pandemic and the war. It seems pointless to look at the Chicago National index today when probable new lockdowns in China are going to screw up global supply chains even more and cause bigger shortages and longer delays. We’d guess markets are also underweighting Musk’s deal to buy Twitter, which seems to happening, possibly today (Twitter releases earnings on Thursday). This implies Trump will be back churning out lies and further dividing the country. US efforts are not on a par with European efforts to tame big tech and big social media, a campaign that may well start up again in Congress. It’s hard to know how big a monkey-wrench this throws into US politics, but we can expect Russians (and Chinese) to entry the fray. The dollar is probably overbought and that condition is likely to persist at least until we get “the news,” aka the Fed’s 50 bp hike next week. Foreign Affairs: From left field comes a proposal, trumpeted by newscaster Zakaria, that the US should swallow its pride and its principles and kowtow to the Saudis and Gulf states to get them to raise oil output. By cutting the price of oil, they can single-handedly harm Russia’s revenues, allow Germany and other Russia-dependent economics to skate, and make it clear that sanctions really do work. We guess Biden and Co. are not as willing as the Republicans to let hypocrisy hang out on the clothesline for all to see. Over the weekend, the Secretaries of State and Defense met with Zelinsky in Ukraine and received praise for delivering the goods. Bloomberg reports Russia complained about the US sending military supplies to Ukraine but it’s a toothless threat so far. As far as we can tell from the timing, the US announced re-opening the embassy in Kiev after the Russian threat. Want to get more free analytics? Open Demo Account now to get daily news and analytical materials.

Growing global inflationary pressures have reached Japan. The BOJ's Yield Curve Control has outlived its usefulness.  Abandoning the loose monetary policy, a la SNB, may trigger a massive revaluation of the yen. USD/JPY at risk of collapse – while calling a top on the massive 1,400 pip rally has been hard, this cannot go forever. The Bank of Japan is alone among developed world central banks in promoting a loose monetary policy. Defending a 10-year yield of 0.25% could prove impossible, and if the BOJ abandons it, the yen could surge.  Why has the yen tumbled down? Contrary to other developed economies, inflation remains mostly absent in Japan. When Kikkoman announced a 4% increase in prices of its world-renowned soya sauces, Japanese netizens raged. Deflation has been the country's problem for years, a mindset of falling prices has been dogging Japan since the 1990s and the government's efforts to change the national psyche have been in place since 2012 – but to little avail.  The BOJ has cut interest rates to negative territory (-0.10%), bought a massive amount of bonds, and also went further than other central banks with Yield Curve Control (YCC). Most central banks that bought bonds aimed to push liquidity into the system and also lower long-term borrowing costs. However, they did not have a target in mind. The BOJ went further by holding 10-year yields close to zero. When it was first announced in 2016, the band was either 10 basis points below or above 0%, and now it is 25 bps.  In the meantime, the world has changed. Inflation is rising in other places, most notably the US, where annual price rises hit 8.5% in March. That has prompted central banks to tighten their policy. They abandoned buying bonds, signaled interest rate increases and eventually announced hikes. The pace varies from country to country, but the direction of travel is clear – raising rates. That has pushed bond yields higher all over the world, with Japan standing out as the exception.  Nevertheless, the world is connected and when money flows out of markets and bonds almost everywhere, this ditching of government debt came also to Japan. That pushed the 10-year JGB yield toward the 0.25% limit, and the BOJ promptly intervened to defend its policy by buying more bonds.  In turn, this enchanted creation of the yen devalued the currency and pushed investors to buy assets abroad, further exacerbating the yen's decline.  How long can this go on? At the beginning, officials in Tokyo must have been smiling inside – a weaker currency makes exports more attractive and gently pushes prices higher. However, the lower and the faster the yen falls, there are growing risks.  First, Japan's trading partners may see the BOJ's action as gaining an unfair competitive advantage, or a "beggar thy neighbor" policy. Japan's finance minister Shunichi Suzuki also talked about bilateral conversations with the US to tackle the situation. Secondly, Japan could receive more than it wished for – a fast and uncontrolled depreciation of the yen could trigger high inflation and perhaps even panic that would further worsen the situation.  Third, it is amplifying the Japanese government's dependence on funding from the BOJ, crowding out regular investors and making Japan less competitive.  In general, the BOJ is going against the trend, which cannot last forever.  SNBomb, the sequel  There is a precedent for such efforts in the not-so-distant past. The Swiss National Bank fiercely defended its peg of the franc to the euro, enacted in September 2011. However, when the common currency suffered deviation and the European Central Bank was about to announce a bond-buying plan, the SNB abruptly abandoned its policy, sending EUR/CHF from 1.20 to below parity in an instant. That "SNBomb" was dropped on January 15, 2015, a day both forex traders and brokers – some went bankrupt – will never forget.  Will the BOJ pull an SNBomb? A continued effort to maintain yields at 0.25% does not make sense anymore, and the Tokyo-based instition may be forced to walk away. That would trigger a massive revaluation of the yen. The exact response would depend on the abruptness of the move. If the BOJ maintains its policy in principle but expands the band to 0.50%, the yen would continue suffering. However, if it moves it to 1% or 2%, the currency would rise rapidly. A total ditching of the policy would send the yen surging.  USD/JPY levels to watch Despite the recent correction, dollar/yen remains overbought according to the Relative Strength Index (RSI) on the daily chart. A "made in Japan SNBomb" would easily send it all the way to oversold territory.  Some support is at 128, the recent low, followed by 127.85, a temporary cap on the way up.  Further below, 125 is not only a psychologically significant...

Key Highlights EUR/USD struggled to recover above 1.0920. A major resistance is forming near 1.0900 and 1.0920 on the 4-hours chart. EUR/USD Technical Analysis A high was formed near 1.0936 and there was a sharp decline. There was a move below the 1.0865 and 1.0850 support levels. The pair declined below the 61.8% Fib retracement level of the upward move from the 1.0761 swing low to 1.0936 high. The pair is now struggling to stay above the 1.0760 and 1.0750 support levels. A downside break and close below the 1.0750 level could increase selling pressure. The next major support is near the 1.0700 level. Any more losses may perhaps open the doors for a move towards the 1.0650 level. On the upside, the pair might face resistance near the 1.0865 level. The next major resistance is seen near the 1.0920 level or 1.0932, above which the pair could start a steady increase.

Summary The rate on the 30-year fixed-rate mortgage has risen significantly since the beginning of the year. It currently sits at 5%, the highest rate in more than three years. This benchmark mortgage rate primarily reflects two components: the yield on intermediate- to longer-term Treasury securities and a spread that tends to fluctuate over time. The Federal Reserve has held agency mortgage-backed securities (MBS) on its balance sheet since early 2009. We estimate that Fed purchases of these securities have pulled down the yield on the benchmark 30-year MBS by about 50 bps or so on average since 2009. Fed officials have indicated they will allow their MBS holdings to decline in coming months. Will this cause mortgage rates to shoot even higher? Not necessarily. First, markets are forward-looking, at least to some extent, and recent mortgage spread widening is consistent with markets accounting for smaller Federal Reserve MBS holdings going forward. Second, Fed purchases of mortgage-backed securities in recent years have pulled MBS yields lower than actual mortgage rates. As balance sheet runoff progresses at the Federal Reserve, it is reasonable to expect that MBS yields will face more upward pressure than actual mortgage rates. But, mortgage rates could continue to trend higher if yields on longer-dated Treasury securities increase further. The open question is how much higher will the yield on the 10-year Treasury note rise? There is a significant amount of near-term monetary policy tightening already priced into the market. Longer term, markets appear priced for a fed funds rate that is near our estimate of "neutral." In our view, the recent surge in the 10-year Treasury yield should slow markedly, which should dampen upward pressure on mortgage rates. We acknowledge that yields on U.S. Treasury securities could potentially rise even further. The past several months have shown that the economic outlook and expected path of monetary policy can change rapidly. In addition, there are wide confidence intervals around estimates for both the timing and the magnitude of the impact from balance sheet runoff, a fact acknowledged by Chair Powell in his press conference after the March 15-16 FOMC meeting. We doubt balance sheet runoff has been fully priced in yet, but we suspect it is discounted by more than many might suspect, given that the process has not even yet begun. Download the full report

Tough talk from the Fed roiled markets this past week, with stocks as well as precious metals getting hit.  On Thursday, Federal Reserve chairman Jerome Powell said the central bank intends to pursue a more rapid pace of interest rate increases. He indicated that a 50-basis point hike in May is likely.   Jerome Powell: We really are committed to using our tools to get 2% inflation back and I think if you look at, for example, if you look at the last tightening cycle, which was a two-year string of 25 basis point hikes from 2004 to 2006, inflation was a little over 3%. So, inflation's much higher now and our policy rate is still more accommodating than it was then. So, it is appropriate, in my view, to be moving a little more quickly. And I also think there's something in the idea of front-end loading, whatever accommodation one thinks is appropriate. So, that does point in the direction of 50 basis points being on the table, certainly. We make these decisions at the meeting and we'll make them meeting by meeting, but I would say that 50 basis points will be on the table for the May meeting. Fed officials are vowing to get their benchmark rate up to a “neutral” level by the end of the year. Futures traders are currently anticipating a 2.75% Fed funds rate.   Whether the Fed will actually get there is questionable. A downturn in the economy or a panic in the stock market would likely halt the Fed’s rate hiking campaign dead in its tracks. Another question is whether the rate hikes that do come will be enough to blunt inflation pressures. The latest Consumer Price Index report shows price levels rising at over 8% annually. Even if inflation cools off in the months ahead, it may not get down to anywhere near the Fed’s 2% target.  Negative real interest rates are likely to persist regardless of how many nominal hikes central planners push through. That means savers who are hoping for money market yields to catch up with the inflation rate will be disappointed. The need to seek alternative vehicles for saving and preserving wealth is as pressing now as ever.  The worst of the inflation wave could be yet to come.   There are signs that food costs will continue to accelerate higher and a very real possibility of widespread global food shortages. The Russia-Ukraine war will severely diminish farm output in the region. And as Russia is a major producer of fertilizer ingredients, Western sanctions are constricting global supply chains to farmers.  To make matters worse, rail transportation backups in the U.S. are limiting delivery of fertilizer to farmers. Union Pacific Railroad announced this week that it will reduce service to fertilizer suppliers by 20%. Grain capacity is also being reduced. This development couldn’t have come at a worse time for farmers heading into peak planting season.  What comes next could be social unrest. Inflation uprisings are already occurring in Third World countries.  At the very least, an uprising at the ballot box this November seems certain to occur. President Joe Biden’s approval ratings are low and going lower every month as inflation frustrations mount.   Voters shouldn’t expect any serious political solutions to the current predicament.  Yes, there are some things a new Congress could do to push back against the Biden spending agenda and open up domestic energy production.   But regardless of which party controls Congress, the cycle of government spending and borrowing will persist. And an unaccountable Federal Reserve will continue to enable it all by expanding the currency supply.  Despite their tough talk on tightening, central bankers always bend to pressure from Wall Street whenever markets come undone. Fiscal and monetary soundness won’t return to Washington any time soon. But individual households can still opt to put themselves on a sound money standard.   It starts by doing the opposite of what the political class has been doing over the past few decades. Since abandoning gold backing for the currency, spending and borrowing have exploded and the value of the U.S. dollar has plummeted.  That is the root of the current inflation problem.  Households that spend and borrow recklessly will grow poorer over time even as they enjoy the temporary high of new cash infusions from creditors.  Those who do what seems to be the responsible thing by saving can also grow poorer over time as any savings denominated in Federal Reserve notes lose value.   There may be a place for chasing growth opportunities when they present themselves in equities and other markets. But a solid foundation of cash reserves should come first.  The best form of cash isn’t issued by any government. It’s dug from the earth by miners and...

Overview: The dollar is surging into the weekend, amid tumbling stocks and rising rates. The euro has been sold through $1.08 after reversing lower yesterday, despite the stronger than expected flash April PMI. Poor UK consumer confidence and a sharp drop in retail sales has seen sterling sold to new lows since November 2020, below $1.2900. The beleaguered yen is consolidating its recent drop and remains inside the range seen Wednesday for the second consecutive session. Most Asia Pacific equities fell though China's CSI 300 rose 0.45% to snap a five-day slide. Europe's Stoxx 600 gapped lower and is now lower on the week. US futures are slipping lower. European rates are a bit firmer after yesterday's surge that lifted the 10-year Gilt above 2% for the first time since 2015. The German 2-year trade at almost 0.25%, is the highest since 2014. The US 10-year yield is up around four basis points to 2.95% and the 2-year yield is up seven basis points to 2.76%. It is up about 30 bp this week. Most emerging market currencies are lower. The dramatic sell-off of the Chinese yuan gained momentum. It is about 0.6% lower to bring this week's drop to 1.8%. It is the largest drop in several years. Gold is off around $10 to almost $1940. It settled last week closer to $1978. June WTI is consolidating in a $101-$104 range. US natgas is slightly softer and is set to end a five-week surge. Europe's natgas benchmark is off 2% after rallying 9% yesterday. It is up about 3.7% this week after falling more than 14% in the previous two weeks. Iron ore was firm today but off 3% for the week. Copper is giving back yesterday's 1% gain and is about 1.5% lower on the week, the first weekly loss in three. July wheat is falling for the fourth consecutive session and is around 3.5% lower this week after a 12% gain over the past couple of weeks. Asia Pacific Some sensationalized reports played up the intervention angle on talks between Japan's Finance Minister Suzuki and US Treasury Secretary Yellen. The call out from the meeting suggests the rapid yen moves were discussed, foreign exchange was not the main focus. They reiterated the boilerplate G7/G20 stance that markets ought to determine exchange rates, but excess volatility is not desirable. A senior IMF official acknowledged yesterday that the yen's weakness reflects economic fundamentals. The Fed is tightening. The BOJ is not. As we have noted central banks want exchange rates to follow monetary policy, otherwise it offsets or blunts official efforts. Japan's data showed an economy recovering and energy-led price pressures. The preliminary April PMI shows slightly slower growth in manufacturing activity (53.4 vs. 54.1) and better services (50.5 vs. 49.4). The composite rose to 50.9 from 50.3. The headline March CPI rose to 1.2%, as expected, from 0.9%. Excluding fresh food, its core rate, edged up to 0.8% from 0.6%. However, excluding fresh food and energy, Japan is still in deflation (-0.7% vs. -1.0%). The BOJ meets next week and is expected to lift its inflation forecast from the 1.1% projection in January. Australia’s flash April PMI shows the economy gaining momentum. The manufacturing PMI edged up to 57.8 from 57.7. The service PMI rose to 56.6 from 55.6. This translated into a 56.3 composite reading after 55.1 in March. It is the highest since last June. After Australia's national elections next month, the central bank is expected to hike rates in June to begin the tightening cycle. The market is pricing in a 40 bp more that would bring the cash target rate to 0.50%. The BOJ will continue its fixed-rate purchases of 10-year government bonds next Monday and Tuesday. At today's operation it bought about JPY427 bln after not receiving any offers yesterday. The dollar is consolidating against the yen and remains within the range set Wednesday (~JPY127.45-JPY129.40). The five-day moving average is slightly above JPY128, and the greenback has not closed below it since April1. After reversing lower yesterday, the Australian dollar has taken another leg lower today. It is being sold through $0.7315, the (50%) retracement of the gains since the late January low near $0.6970. The 200-day moving average is slightly below $0.7300 and the next retracement (61.8%) is closer to $0.7235. The market may debate about the existence of a Fed put in the stock market, but China seems to have an Xi put. After the recent slide in Chinese shares, China's Securities Regulatory Commission encouraged large financial firms to boost their allocation to stocks. The CSI rose today for the first time in six sessions. However, it offered no reprieve to the slumping yuan. The sharp sell-off continued for the fourth consecutive session to bring this week's loss to 1.8%. The...