Commodities | Equities | FX | Global | Rates
Markets to Watch This Week: USTs Steepening to Continue
- By Bilal Hafeez
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We standardise price changes across different markets to allow for cross-market comparisons.
Market Moves Last Week
Last week saw weakness across both fixed income and equity markets as inflation fears persist, and central bank hawkishness is increasingly priced.
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We standardise price changes across different markets to allow for cross-market comparisons.
Market Moves Last Week
Last week saw weakness across both fixed income and equity markets as inflation fears persist, and central bank hawkishness is increasingly priced.
The 10Y UST yield (+2.9 standard-deviations) saw the largest vol-adjusted move of the week with a rise of30bps, the largest weekly increase since 2016. Short-end UST yields remained comparatively stable, with the 2Y holding just above 2.5%, leaving US2s10s to return to positive in its largest weekly steepening since 2013. The talk of recession has not faded, but our model now assigns a 50% chance of a recession over the next 12 months down from last week. It was a negative week for fixed income in general, with yields rising across most geographies we assess. The exception was in JBGs, where a dovish BoJ helped the 2Y yield fall 3.3 standard-deviations.
Big tech saw outsized losses last week, as NVIDIA, Alphabet, Amazon, and Microsoft joined the NASDAQ in a poor week of performance. Likewise, the Russell 2000 fell back below 2000 and is approaching year lows. The FTSE-100 was the only outperforming DM equity index, it pushed through 7,600, just below all-time-highs. In EM, BOVESPA (Brazil) pulled back from recent highs, while TSMC (Taiwan) saw another bout of weakness, down 1.3 standard-deviations last week.
EUR and JPY underperformance continued. JPY weakness vs USD continued, with the pair moving above 125 (a 1.8 standard-deviation move). EUR/USD dropped last week, as price action this week is likely driven by ECB expectations – Henry expects no change to ECB policy.
EUR and US HY CDSs bounced back higher, up 1.7 standard-deviations over the past week in line with the weakness seen across other markets.
$-bloc swaps widened as the RBA are expected to hike by June, the market is fully pricing a 50bp hike at Wednesday’s BoC meeting, and 40bps at the RBNZ’s. There has similarly been a hawkish shift in market pricing of the Riksbank.
What we’re looking for this week
Central bank’s policy (ECB, RBNZ, BoC) will keep markets occupied. We think the ECB are unlikely to change policy until new forecasts (at their June meeting). Meanwhile, the second round of the French election should see market price in further weakness in OATs and CAC. Turning to the US, data and speakers should keep a 50bp hike in May well priced and we expect UST 2s10s steepening to continue.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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It’s been 2 weeks since this post about bearish steepening. Do you think the curve will steepen further? How did the yield curve behave during Volker’s rate hike period?