As the debate shifts from a soft vs. hard landing to any landing

Asia open

China's MLF decision is the highlight on an expectedly quiet day in Asia, while in Forex land, JPY and JGBs remain in the spotlight ahead of Wednesday's Bank of Japan meeting.

But with two-year US yields bouncing higher into Friday's close, which could limit some of the zeal off from last Thursday's lower trending inflation print, US futures are quiet. 

The rise in US 2-year yields is more of a factor from terminal rate expectation staying higher and a 5 % problem risk markets have already absorbed.  But for investors to stay in the risk-taking zone t, spot inflation in the US inflation must remain mild enough to diminish the risk of a longer Fed hiking cycle.

Driven by the combination of China re-opening and falling Nat Gas prices, the market is forced to upgrade its pessimistic growth outlook for this year. Peak recession fears may end sooner rather than later, and H2 could see a renewed pick-up in economic activity precisely when major central banks stop hiking. 

Hence, looking ahead, I continue to think that the strength of the labour market, plus the peak policy drag that is happening in real-time, implying the policy impulse is fading, tells me the second and more difficult leg of getting core inflation to the fed's mandate will be more challenging given the resilience in the hard economic data.

As the debate shifts from a soft vs. hard landing to any landing, we are learning quickly that the economy can easily tolerate higher rates, which has important implications for policy and the market. Central banks will likely keep rates at these higher levels longer (and hike more, if necessary, especially the ECB). So, we should not expect immediate and aggressive rate cuts soon after we reach the terminal rate in this cycle. Indeed, this is the "new, new normal". It's a central banker's dream because they can successfully escape the zero rate / QE environment. and have significant room to cut when they eventually need to.

Forex

On the back of Raphael Bostic's comments telling CBS News he's leaning toward supporting smaller rate hikes at the next FOMC meeting following last Thursday's CPI report, EURUSD looked far too cheap, so FX traders were buying out of the gates this morning. 

Gold

Gold is doing what gold traders expect to do this year, maintaining a very tight inverse correlation to the US dollar. The USD is likely to decline through 2023, which sets up a reasonably decent entry at the current levels, given the US dollar is just starting to embark on the expected downtrend.

Oil

Oil is trading a touch lower this morning which may be a function of the post-China Lunar New Year Covid surge debate picking up.