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Markets:
- Gold down $38 to $1938
- US 10-year yields up 13 bps to 3.60%
- US 2-year yields up 26 bps to 4.18%
- WTI crude oil up $1.86 to $69.33
- S&P 500 up 54 points, or 1.4%, to 4037
- EUR leads, NZD lags
There wasn’t much in the way of newsflow to get markets moving on Tuesday but there was some movement nonetheless. The US dollar generally strengthened in North American trade as yields moved up and the market became more comfortable with the idea of a 25 bps hike on Wednesday.
On the banking front, the regional bank ETF was up 2.5% and First Republic was up 31% in a sign of tentative calm. Large gains were also seen in European financials as the market combs through the post-Credit Suisse wreckage and determines that better bail-in rules won’t undermine capital. Even as the dollar strengthened broadly, the euro stayed right with it to finish the day up 50 pips in a reversal of last week’s declines (and more). The idea there is that the ECB may still tighten and ultimately the spread between the FOMC and ECB will be tighter than thought a few weeks ago.
What was somewhat troubling was the decline in commodity currencies and GBP. That group is sensitive to equities and could be flagging risks around global growth, even if we had a big bounce back in risk assets today. For the loonie, the decline coincided with a soft inflation report but that’s hardly the full picture as it still outperformed its commodity compadres. Oil helped as it gained 2% but it’s still far below the levels from the stat of the month.
Perhaps the undershoot in Canadian inflation is a sign of what’s to come in the US? CPI has fallen rapidly and something similar would give the Fed plenty of cover to stop hiking and — if combined with financial stability — that’s a good elixir for risk assets. Of course the first big step towards calm will be getting through the minefield of the FOMC decision and dot plot tomorrow. Sleep well, Jerome.
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