US EARLY MORNING: US equity futures are higher. The Dollar jumps as US yields rise to 3yr highs

EQUITIES: US equities were mixed on Monday, in choppy, holiday-thinned trade. US index futures are trading higher by 0.3-0.6% ahead of Tuesday’s cash day (RTY +0.6%, NQ +0.4%, ES +0.4%, YM +0.3%). Overnight, the APAC session shrugged-off a weaker Wall Street lead, although European indices opened more cautiously on their return after the long weekend. Tuesday’s tape action is being attributed to ongoing Russia-Ukraine headlines (Ukraine said Russia was moving onto the “second phase” of its campaign with a large-scale offensive in Donbass), as well as monetary policy themes (hawkish Bullard on Monday, underwhelming PBoC actions over the weekend ahead of the upcoming LPR setting meeting overnight, BoJ/Fed divergence, as well as ECB/Fed divergence). The focus in the US will begin shifting to corporate reporting, with a number of heavyweights due to report this week - today, numbers are due from JNJ, LMT, PLD, NFLX, IBM (our full daily calendar of earnings expectations can be accessed here), and after the European close L’Oreal (OR FP) will report. Over the weekend, Morgan Stanley told its clients that inflation would no longer be a net positive for earnings growth, and warned that earnings revisions will decelerate amid Q1 reporting season; the bank cites its Business Conditions Index, which is a survey of its industry analysts, which has fallen further while margin headwinds continue to mount - the bank argues that these are not fully reflected in analyst' consensus estimates. MS wrote that "P/Es tend to de-rate significantly when the market no longer believes the forecasts," and "while P/Es have de-rated this year as we expected, they remain stubbornly high when taking into account the historically sharp rise in 10 year yields." The bank says P/Es are down by around 11% since it published its year ahead outlook, but this de-rating has via higher rates, as the Equity Risk Premium plummets. "This would suggest that the equity market is not worried about growth at all but just higher rates," the bank wrote, "in fact, with the equity risk premium now at its lowest level since the GFC and since the financial repression era began, it's fair to say the equity market is less worried about growth today than it has been at any other time over the past 15 years."

TREASURIES: Yields are higher by 2-4bps across the curve, rising to fresh three-year highs; major curve spreads are steeper by around 1-3bps. The price action has underpinned by further Fed commentary after the hawkish 2022 voter James Bullard Monday suggested that a +75bps rate hike increment was an option for the FOMC if it needed to act more aggressively to curb inflation pressures, although he added that this was not his base case; data last week showed that consumer prices in March rose at the highest monthly rate since 2005. Money markets are now aggressively positioned for a +50bps move at the May confab, with the implied probability of that outcome now at 98% according to Refinitiv data; looking to the end of the year, markets are still expecting rates will move up to 2.25-2.50%, emphasising the front-loaded nature of the expected hiking trajectory to bring rates back to neutral “expeditiously” (note: the Fed estimates neutral is around 2.4%). Today’s housing starts and building permits data, as well as Wednesday’s existing home sales data, will be assessed within the context of how the more expensive cost of borrowing is weighing on the housing sector. We will also get a gauge on how concerned Treasury investors continue to be about the prospects for high inflation ahead with the Treasury set to issue USD 20bln of 5yr TIPS on Thursday, following an issue of USD 16bln of 20yr bonds on Wednesday.

DOLLAR: The Dollar Index is around flat, but overnight rose to the highest levels since 2020, supported by Treasury yields picking up to three-year highs. The monetary policy divergence theme also appears to have been aggressive in overnight APAC trade. The Fed is expected to hike aggressively this year, while the BoJ is expected to lag this course. USD/JPY has picked up in spite of warnings from officials: Finance Minister Suzuki again attempted to jawbone overnight, but the currency has weakened to the lowest levels vs the USD since 2002. The finance minister will discuss FX moves with his US counterpart at the G20 meetings this week. Elsewhere in G10, activity currencies are trading higher, with the AUD outperforming after the latest RBA meeting minutes; Aussie bank Westpac said the Board was now giving greater attention to inflationary risks, and that the timetable for rate hikes had been brought forward, also noting that there was some unease that current market pricing may be under-estimating the inflation challenge. Elsewhere, EMFX appears to be struggling to make ground against the dollar.

CRUDE: Crude benchmarks are around USD 1.00-1.10/bbl lower, giving back some of the gains notched up over the last four sessions. ING says the market remains well supported, with supply disruptions in Libya, the EU working on a Russian oil embargo, while other data today showed that the OPEC+ group was producing 1.45mln fewer barrels than March production targets laid-out; compliance in the month was said to be running at a clip of 157%, up from the 132% in February, Reuters said. Perhaps offsetting that supply dynamic is the demand side in China, which has been challenged by continued Pandemic restrictions, which has seen a number of analysts reduce growth expectations and the central bank provide more support to the economy; geopolitical analysts at Stratfor cite a growing number of companies questioning when the world’s second largest economy will end its so-called ‘zero COVID policy’, particularly as other countries in the region relax restrictions even at a time when case counts are rising.

DAY AHEAD: The data docket is thin for the day; the IMF World Outlook will be released (likely to show growth challenges in the near-term combined with higher inflation), and after the US close, weekly energy inventory data from the API. Our full 'Day Ahead' calendar can be accessed here. The US corporate earnings slate features JNJ, LMT, PLD, NFLX, and IBM (our full daily calendar of earnings expectations can be accessed here); Europe’s L’Oreal (OR FP) reports after the close.

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19 Apr 2022 - 09:55- EnergyData- Source: Newsquawk

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