Putin Doubles Down....Rates Rally...Big Steepening...Fed Rate Hikes Priced Out
Bloomberg reports that "Military experts said a missile strike on the center of Kharkiv and satellite images of huge convoy of Russian military vehicles heading to Kyiv show a frustrated Moscow is SHIFTING TO A MORE DESTRUCTIVE PHASE OF WAR"... Washington Post now says Kharkiv is surrounded...Ukraine reports the killing of over 5700 Russian troops... Clearly the war is accelerating and the markets are responding...
Rates...large short base of strategies setting up for the Fed rate move in two weeks are getting smoked...2 years moved from 1.47 at 9 PM to 1.26 at 6 am...21 basis... And 35 in the last few days...10 years have moved from 2.07 at the highs to 1.73 now...we have resistance at 1.65... Yield curve has been steepening... Rate hikes have been moved out further and smaller than had been expected as recently as last week...
Powell is in another tough spot... Missed opportunities where he easily could have raised rates early in the year... Now the 50 basis potential for March is out the window ,even with looming inflation numbers next week...Heck, even 25 basis is being challenged with Wirp no longer showing a 100% change of 25, currently at 98%.... Two rate hikes for the end of the year has been built out of the markets, from 6.55 to 4.65... And 10 year German Bunds, which had been as high as .32 positive, is now back to negative... So what will the Fed do?... Probably raise 25... But if this Fed were opportunistic, and they have shown that they are not, they could let some treasuries go right now while the FTQ is in vogue... Not only will they not do this, they are still buying for another two weeks... Absurd..
Equities... While worried about the Ukraine invasion and the higher oil and inflation it will bring, equities have their other eye on the Fed and the realization that this situation will slow the Fed down... Even with inflation soaring... Overnight the S+P 500 hit a high of 4399 at 2 am, then slid almost 80 points as we started to write this commentary... It is currently 19 points off the lows... Nasdaq also had a big move of 250 points up and then down, currently down 95... Marko Kolvanic of JP, said "the worst may be behind us for risk assets"... GS disagrees....
So what do we think?... We think Powell will be evasive tomorrow in front of the house... Try not to get boxed in before the Fed goes into the Black out period at the end of the week..Ukraine could be over by the time the Fed meets....Shorts have been smoked in the last few days, but we think Powell will find the way to raise rates and look beyond Ukraine. We still think 4 rate hikes this year and balance sheet reduction... But the 7 rate hikes portrayed by GS, BOA , and JPM, now look outdated... Nonetheless next weeks CPI will be a big one with only three survey members posting from 7.5 to 8%... With MS at the high...
Strategy... Fade the current moves...but it will still be a volatile day... Spreads are looking a bit ugly and no new issues came yesterday... But the short base in treasuries and flatteners have taken some pain.
Final...State of the Union tonight...Biden's first... He is in a tough spot... Inflation has the focus of the populace and now Ukraine... Maybe he will find a way to help Ukraine, but we doubt it... There are no good solutions we see that don't involve troops...but it still could be a market moving event... We will post if the markets move on the speech
