In case you were in any doubt: Lael Brainard, a Fed governor and vice-chair in-waiting, notably the leading voice on the more dovish wing of the FOMC, began a speech yesterday with quotes from Paul Volcker.  

“Forty years ago, Paul Volcker noted that the dual mandate isn’t an either-or proposition and that runaway inflation ‘would be the greatest threat to the continuing growth of the economy… and ultimately, to employment’.” 

She then went on to quote another former Fed chair, Arthur Burns, who noted in the late 1960s that “there can be little doubt that poor people…are the chief sufferers of inflation”. 

That’s now the two big beasts channelling Volcker. On March 3^rd, Senator Shelby asked Powell: “Volcker put the economy in a recession to get inflation under control. Are you prepared to do what it takes to get inflation under control?” Powell replied: “I hope history will record that the answer to your question is yes.” 

Hawkish credentials assured, 50bps of hikes in May and June are nailed on. We learn more tonight with the release of the FOMC minutes, but the latest commentary is what matters. Market pricing is already above the dot plot.

Brainard put forth where the Fed is today, saying “it is of paramount importance to get inflation down” and the Fed will “continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting”. Yields inverted further… DB: “We see the Fed’s tightening beginning to materially slow growth in the second half of 2023. Our baseline forecast has negative quarters for growth in Q4 2023 and Q1 2024, consistent with a recession during that time.” It sounds as though the Fed is willing to trigger a recession to bring down inflation…

The bear market rally of the second half of March had already shown clear signs of breaking down before this, but the comments helped to nudge the market over: bonds blew out, stocks fell sharply. The US 10yr rose 0.16% to 2.56% and has sold off again overnight to 2.62%.  The S&P 500 fell 0.8%, led by declines in tech as rates rose. NDX fell 2.24%, whilst the Nasdaq Composite was lower by 1.81%. The Dow was off just 0.45% with Utilities and Healthcare catching some bid among the defensives. ARKK declined almost 6%. Twitter shares added a further 2% after Elon Musk was elevated to the company’s board after taking a 9.2% stake in the company…so much for that passive investment, but hey, it’s Elon.  

BofA: “We are in the late-stages of a short-cover-rally as the implied vol spike in heavily-shorted names has started to fade”. 

Market action over the last few sessions has been essentially to drift. As noted over a week ago Monday: “Volatility has declined with the Vix down to the mid-20s, which indicates conditions for chopping sideways.” The Vix did move up yesterday but is not showing big signs of stress just yet…looking at an imminent bearish crossover on the MACD for SPX below.

The rise in US yields helped lift the dollar again. EURUSD trades under 1.09, the weakest in a month, whilst GBPUSD retreated to test the March 29^th lows at 1.3050. USDJPY extended gains to 124.

Europe not looking great, hawks and doves still playing out a game in public. ECB policymaker Wunsch said “based on the current outlook…we will raise interest rates to 0 by the end of the year”. German factory orders down 2.2% month-on-month before the full extent of the Russian invasion, so likely to deepen. European stock markets have opened a little lower this morning but essentially flat. 

China too struggling with lockdowns and the problem of getting goods to market: the China Caixin services PMI contracted to 42.0 from 50.2, the sharpest decline in two years. Chinese shares were mainly lower overnight as trading resumed following the long weekend. 

With further sanctions for Russia incoming, oil prices are a bit higher but remain capped by the 20-day SMA resistance with the 50-day the main support. Generally rising market above the 20-day and falling when below. EIA inventories later today.