MARKETS
Even with the labor market appearing softer than expected, investors struggle to add risk. However, some extreme hawkish bets and stretched positions are getting pared, but today should not be mistaken as a base-building exercise.
Without weaker data, the market is still very much at risk of a hawkish Fed narrative; hence, investors desperately need to see the hawkish-dove meter turned to a tad less hawkish setting.
What could emerge risk supportive is the seasonal adjustment for February US nonfarm payrolls, which revert from positive (+3mm) to negative (-600k700k), which one might think of allowing that turn in the hawkish-dove meter to a tad less hawkish setting.
In addition, the risk-reward for bearish front-end positions certainly has become tenuous after estimates of "neutral" exceeded all previous tightening cycles except for the late 70s; Unlike the late 70s, inflation expectations have remained broadly anchored. Therefore, it is not clear that a more restrictive monetary policy stance is required to fight the current level of inflation.
FOREX
After Governor Kurdoa " passed-the- the baton" without any YCC change, market expectations that the new BOJ leadership under the government's nominee, Mr. Kazuo Ueda, could amend YCC at its first MPM in April are likely to increase.
Issues surrounding market functioning will likely be a significant topic of discussion at the post-MPM discussions. The BOJ's widening of the 10-year yield band in December and maturity extension of funds-supplying operations against pooled collateral in January aimed to improve bond market function. However, according to its latest bond market survey in February (conducted February 1-7)
But for now, until the next BoJ meeting comes into the market line of sight, USD/JPY should move more freely with US real rates, which still appear skewed toward higher US rates; however, that could change quickly if US rates start to see some relief, perhaps due to renewed recessions concerns on payback in the upcoming activity data, especially if that also leads to a more dovish March FOMC meeting after expectations have repriced significantly higher over the last couple of days.
ASIA FX
The ongoing increase in rate volatility means that Asia FX – like other risky assets – will remain highly sensitive to the upcoming US data flow, so there is much riding on the NFP and CPI upcoming US data points.
CORRECTION
In correcting this morning's note regarding the mortgage market meltdown, which I think will hit home globally, but SVB ( at the eye of the storm) focuses on servicing emerging to middle-market growth technology companies that venture-capital firms usually back.
They announced they had significant losses on security sales and would undergo a stock offering to shore up its balance sheet. ( in a prepared statement) Silicon Valley Bank's CEO pointed to the expectation of higher rates and persistent client outflows as to why the lender incurred a one-time $1.8bn loss on a security portfolio sale.
But getting back to my follow-up note ( Where there's smoke, there's fire) and considering the client outflows result from higher rates of volatility and a persistent yield curve inversion, it is not a stretch to say that this latest episode is allegorical of the higher-for-longer rate regime that we may well be trapped in through 2024, and which could result in the perfect storm of all the bad things we've been worrying about in this cycle.