US EARLY MORNING: US equity futures are rising in sympathy with European peers; more Fedspeak ahead

EQUITIES: APAC equities shrugged-off the negative lead from Wall Street, to trade higher; European indices also looked through a downbeat pre-market to trade firmer after the open. US index futures are now higher by around 0.5%, rising in sympathy with European peers. Fed Chair Powell emphasised that the FOMC can raise rates in 50bps increments if required (last week he seemingly was pointing towards a ‘steady’ approach), and also sounded a bit more concerned on inflation dynamics. As yields rise on the anticipated rate hike cycle from the Fed, equity traders have been looking at gauges that try to judge if stocks are likely to be derailed by the bond market sell-off. There is an excellent discussion in John Authers note this morning here; he argues that using an equity risk premium model, equities still look like an emphatic buy, as does Schiller’s CAPE model where on long-term valuations, stocks are still yielding more than bonds. From a technical perspective, ES traders note that the index is dancing between the 50- and 200-day moving averages (at 4,417 and 4,467 respectively) and will be eying any breakout from this range for shorter-term direction.

TREASURIES: Yields are higher by 4-6bps, with the short-end bearing the brunt of underperformance; the shape of the yield curve continues to flatten. Yield curve inversion can be a harbinger for recessions ahead. These inversions along parts of the US curve apparently make the case that the economy cannot handle the anticipated tightening of rates. Some desks are suggesting that it would be wise to focus on the 2yr/10yr spread (currently around +16bps), and the 3mth/10yr spread (currently around 179bps); Capital Economics notes that since the 1980s, on the four occasions that 2s10s has inverted, a recession has followed. But it argues that the 3mth/10yr spread is still firmly positive, meaning that the probability of a recession implied by it is much lower–albeit not reassuring, and likely to flatten as the Fed continues hiking. The consultancy does not see the 3mth/10yr inverting, and therefore argues that the US will avoid recession. Historically, the 10yr yield has tended to fall significantly following 2s10s and 3m/10yr falling to or below zero. That said, one important caveat to note, is that this history usually coincided with the curve bull steepening, as the Fed then eased policy to offset the downturn – Powell's remarks over the last week suggest that the Fed will be more resolved in tightening policy on this occasion due to the high inflation pressure, and in fact, Powell also said that the Fed was prepared to raise rates above the so-called 'neutral level', putting a lid on demand, in order to manage price pressures, which leaves traditional comparisons somewhat lacking.

DAY AHEAD: There are a lot of central bank speakers today, including Fed bigwig Williams (permanent voter), Daly, Mester; money markets now see rates rising to 2.00-2.25% by the end of this year in wake of the hawkish Powell; the Fed last week forecast a rise to 1.75-2.00%. ECB heavyweights are also on the slate, with Chief Economist Lane and President Lagarde due to make remarks (money markets are now pricing 50bps worth of rate tightening through the end of this year). Elsewhere, the Hungary Central Bank rate decision will be eyed for EMFX traders, and supply from Germany for the debt traders. Full Day Ahead here. 

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22 Mar 2022 - 09:25- EquitiesResearch Sheet- Source: Newsquawk

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