US EARLY MORNING: Index futures continue upside; many looking through yield curve inversion signals

EQUITIES: APAC equities rose after a positive handover from Wall Street. European equities are advancing, underpinned by geopolitical optimism (delegations have arrived in Turkey for ceasefire talks, Russia no longer calling for denazification, prepared to allow Ukraine to join EU if it remains militarily neutral) and lower crude oil prices (geopolitical optimism, China lockdowns weighing on demand side, OPEC+ to keep policy steady this week). Yields continue to rise on an expected hawkish Fed normalisation trajectory, but this is not derailing equity momentum just yet (RTY +0.5%, YM +0.3%, ES +0.3%, NQ +0.3%). The ES is currently on course to print a fourth day of gains, and has added over 7% vs levels seen just 10 sessions ago. We have recently noted that many desks are suggesting that ‘this time might be different’ regarding the recessionary signalling power of Treasury curve inversions; this is a point JPMorgan has reiterated to its clients. The bank notes that "from the point of curve inversion to the actual peak of the equity market, which typically takes place around a year later, S&P 500 was higher by 15%," adding that "the clock has not started ticking yet, and the upcoming quantitative tightening could matter for the timing, delaying proceedings." JPM does not see an outright recession this year: it notes that while the 2s10s curve has been flattening -- its inversion has been historically an accurate recession predictor – the 3mth/10yr spread (whose inversion has historically been another leading recession indicator) has been widening. "Crucially, the flat/inverted yield curve was historically a good cycle signal because it would be indicating that financing conditions have become highly restrictive, but we do not see this to be the case at present," the bank writes, "real rates averaged +200bp at the time of past curve inversions, vs current negative, while bank lending standards are still easing and they can support continued credit expansion." The bank has recently argued that Fed tightening can cause volatility, but this weakness gets absorbed and markets move higher, and accordingly, it still believes that recession is not a base case in the US or even in Europe.

TREASURIES: Yields are higher by 2-4bps across the Treasury curve; the shape of the curve is flattening (2s10s -4.7bps, falling sub 8bps today, inching closer to zero – an inversion would get a lot of attention due its historical signalling power, although as noted above and in recent notes, many desks are suggesting this time may be different). Underperformance is once again concentrated in the short-end of the curve, where 2yr yields have risen to a fresh three-year high around 2.44%. Monday’s 2yr auction was soft, although the 5yr sale was constructive, and the 2s5s spread continues to narrow on Tuesday (-4bps). 5s30s remains inverted, but at around -2bps vs -7bps at one point on Monday. Money markets imply that there is an 80% chance that the Fed will raise rates by a 50bps increment in May, and see rates rising to 2.25-2.50% by year end (the Fed recently projected a rise to 1.75-2.00% by the end of the year). The Day Ahead features more Fedspeak by way of Fed’s Williams (voter), Harker (2023) and Bostic (2024); there is also 7yr supply. After the US close, API will release weekly energy inventory data. Full Day Ahead here.

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29 Mar 2022 - 09:57- Fixed IncomeResearch Sheet- Source: Newsquawk

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