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08 Mar 2023

Policy divergence

• Higher for longer. Markets continue to bolster their US rates outlook. Others are at a different point. The Bank of Canada paused overnight.• US curve inversion. The jump in rate expectations has moved the US yield curve further into negative territory. The curve has a strong record of picking US downturns.• AUD sub $0.66. Deeply negative rate differentials are a AUD headwind, but the high terms of trade is an offsetting factor. Relatively calmer markets overnight. US equities consolidated, while bond yields ticked up further and were once again led by the front-end of the curve. The US 2yr...

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Rates, Relief, and Reincarnation

The Bank of Canada held rates steady a few minutes ago, and many homeowners are probably experiencing feelings of relief, hoping for lower borrowing costs and a recovery in real estate values. But James Carville, Bill Clinton’s chief strategist (the important kind of strategist, not the FX kind) famously said: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.” If US bond yields keep rising, bank funding...

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Bank of Canada Holds Rates, Loonie Tumbles as Forward Guidance Remains Dovish

Following through on a well-telegraphed pledge to hold policy steady, the Bank of Canada held its benchmark overnight rate at 4.50 percent this morning, and reiterated a “conditional” commitment to staying the course. The statement-only decision was not accompanied by new forecasts, but officials said “the latest data remains in line with the Bank’s expectation that CPI (Consumer Price Index) inflation will come down to around 3 percent in the middle of this year. Year-over-year measures of core inflation ticked down to about 5 percent, and 3-month measures are around 3½ percent. Both will need to come down further, as...

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Bigger, Faster… Wronger?

Markets continue to brace for bigger and faster rate hikes from the Federal Reserve after Jerome Powell appeared to reverse earlier optimism about an ongoing “disinflationary process” during yesterday’s Senate testimony. Market-implied odds on a half percentage point move at the March meeting moves above 70-percent in the hours after the Fed chair’s appearance, and have barely subsided since. The two-year Treasury yield is holding above 5 percent for the first time since 2007, the dollar is trading higher, and most majors remain on the defensive. “The latest economic data have come in stronger than expected, which suggests that the...

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