How a Fed Rate Pause Is Likely to Morph into a Cut

While most large equity markets in the Asia Pacific region fell today, Hong Kong and China's CSI 300 rose. The Stoxx 600 in Europe has drifted a little lower. If sustained, it would be the third loss this week. US equity futures are steady to slightly firmer. Benchmark 10-year yield are mixed in Europe. Peripheral yields are 1-3 bp lower while the core is flattish. UK Gilts and Swedish bonds are under more pressure and yields are 3-4 bp higher. The softer US dollar is helping gold stabilize after recording a bearish outside down day yesterday. It closed on its lows near $1940 but has not taken it out, and it is held slightly below $1950. July WTI reached $75 on Monday following the Saudi's unilateral cut of an additional 1 mln barrels a day in output (starting next month). However, it fell back to $70 on Tuesday and is in near the middle of that $5-range today.

Japan revised Q1 GDP to 2.7% annualized from 1.6%. The revision was driven by stronger business spending (1.4% vs. 0.9% initially), which was signaled by the stronger than expected capital spending (11% year-over-year vs median forecast in Bloomberg's survey for 6.0%). The other notable revision was with inventory accumulation. They boosted GDP by 0.4% percentage points rather than 0.1%. Nevertheless, a poll by Bloomberg found only 3 of 47 economists now expect a tightening move next week, down from 18 in last month's survey. Now, a little more than a third of the respondents see July as the more likely timeframe. A fifth look for a change after the summer, up from 10% in the previous survey. Meanwhile, foreign investors continue their buying spree of Japanese equities for the 10th consecutive week. Japanese investor sales of foreign bonds last year were thought to be strategic, but it looks increasing tactical. Last year, they sold about JPY21.7 trillion (~$165 bln). In the first 22 weeks of the year, Japanese investors have bought about JPY12.1 trillion back.

The decline in China's May exports and imports underscored concern about the world's second-largest economy. After banks cut deposit rates at the request of Beijing, the market was already primed for a likely cut next week in the benchmark 1-year medium-term lending facility (2.75%). Tomorrow's inflation data will likely confirm what we already know. Consumer inflation is amazingly low (0.1% year-over-year in April) and producer price deflation (-3.6% in April). May will be the eighth consecutive month of negative year-over-year PPI. China's discount to the US on 10-year yields widened to almost 108 bp yesterday. The low for the year was set in early April near 114 bp. Last year, it reached almost 153 bp, the most since 2007.

Australia reported a 5% fall in exports in April, the largest monthly fall since last July. Imports rose 1.6%, half of the March pace. The net result was a smaller than expected trade surplus of A$11.16 bln. Last April, Australia recorded a trade surplus of A$12.95 bln. Still, the trade surplus has grown this year, from A$41.7 bln in the first four months of 2022 to A$51.1 bln this year. Of note, Australian exports of iron ore and other metals fell in April (-10.4%). Canberra's trade relationship with China, its biggest partner has improved and exports to China are up about 13.6% in the January-April period. Inbound tourism, which has also been an important component of Japanese consumption, rose by nearly 14% in April (travel exports).

The 12 bp increase in the US 10-year yield yesterday helped the dollar post an outside up day against the yen. After trading below Tuesday's low, the dollar reversed and closed above its high. It held below Monday's high (~JPY140.45). Yet, despite the bullish price action, there has been no follow-through dollar buying. The greenback is trading quietly in a roughly JPY139.65-JPY140.25 range. Watch US 10-year yields for the direction cue in the North American session today. It is nearly flat just below 3.80%. The Australian dollar was sold yesterday after popping above $0.7000 but reversed lower. Here, too, there has been no follow-through US dollar buying, and the Aussie is consolidating in the $0.6650-$0.6690 range. Options for nearly A$710 mln expire today at $0.6950. A close above $0.7000 lifts the technical tone. We had thought the CNY7.07-CNY7.11 was a reasonable target, but it has surpassed it. The next nearby chart of note is around CNY7.16-CNY7.20. Recall that last year's high (November 4) was near CNY7.3120. The dollar is snapping a four-day advance today. Since May 5, it is only the fifth losing session. And even it is minimal. The dollar settled near CNY7.1350 yesterday and held CNY7.1260 today. The reference rate was set at CNY7.1280 today, a smidgeon below the CNY7.1282 median forecast in Bloomberg's survey.

The downward revision in the eurozone's Q1 GDP to -0.1% from +0.1% doses not really change anything. The ECB meets next week and there is little doubt in the market's mind about the outcome. A quarter-point hike will bring the deposit rate to 3.25%. The swaps market fully prices in another hike in Q3. The ECB will update its forecasts next week too. In March, it had forecast this year's growth at 1.0% year-over-year. The median in Bloomberg's survey is 0.6%. The World Bank is even more pessimistic with a forecast of 0.4%. The IMF and OECD are closer to the ECB at 0.8% and 0.9%, respectively.

The ECB published the results of its April survey of consumer expectations yesterday. The 12-month outlook fell to 4.1% from 5.0% in March. The three-year expectation eased to 2.5% from 2.9%. The ECB's March forecasts had CPI rising 5.3% this year and 2.9% next year. The median forecast in Bloomberg's survey is for CPI to be at 5.6% at the end of this year and 2.5% at the end of 2024.

So far this week the euro has chopped inside the range set last Thursday, before the US jobs report (~$1.0660-$1.0770). More pointedly, the euro has held below $1.0740, which was about the (38.2%) retracement of the rally from the March 15 low near $1.0515. Although it enjoys a firmer today, it is inside yesterday's range. There is greater uncertainty around the Fed meeting and than the ECB meeting next week. There may be little incentive ahead of the FOMC meeting (and CPI) for speculators to make a big push in either direction. We note that after rising from below 120 bp in early May to around 170 bp earlier this week, the US premium over Germany on two-year money appears to be stabilizing. Except for spending Monday morning on its back foot in Europe, sterling too is mostly consolidating within the range set last Thursday (~$1.2400-$1.2540). It is enjoying a firmer bias today, has held below yesterday's high near $1.25. Also, sterling's five- and 20-day moving averages crossed higher for the for the first time in three weeks. Still, unless it can rise above the $1.2500-40 area, sterling may be vulnerable. Sterling has fared better than the euro, which had fallen from GBP0.8835 in early May to about GBP0.8565 last week, the low for the year. It is straddling the GBP0.8600 area today.

The Bank of Canada ended its "conditional pause" with a quarter-point hike yesterday, which lifted the target rate to 4.75%. As we have noted Canada was the fastest growing economy in the G7 in Q1. It judged that "overall, excess demand in the economy looks more persistent than anticipated." The statement also cited the uptick in inflation and rebound in the housing market to explain its decision. Deputy Governor Beaudry's speech in Victoria, BC later today is expected to provide more insight into the decision. It may pose headline risk because the market has decided that yesterday's hike was not simply an insurance policy, given the growth was concentrated in January and inflation expectations (break-evens) are trending lower, but the resumption of the tightening cycle. The swaps market is pricing in almost a 75% chance of another hike at the next meeting on July 12. And the year-end rate implies around a 60% chance of one more. Separately, from an economic point of view, the Canadian wildfires are likely to weigh on May and June GDP.

Today's US data, which includes weekly jobless claims and wholesale inventories, are unlikely to have much impact. The US also sees the Q1 household net worth report. It does not move the market, but it is important. Last year was the first year since 2008 that household net worth did not increase. On the other hand, over the past five years (20 quarters), US household net worth has risen by $44.2 trillion. Over the last ten years (40 quarters), it has risen by $75.8 trillion.

The market pushed the dollar to a new seven-year low against the high-flying Mexican peso ahead today's CPI report. Mexico reports CPI for the second half of May as well as for the whole month. The headline rate is expected to fall below 6% for the first time in nearly two years. In the first four months of the year, Mexico's CPI has risen at an annualized rate of almost 4.5%. The core rate is running nearly twice as hot. The central bank is done raising rates and the swaps market is pricing in a cut before the end of the year.

The Bank of Canada's hike saw a quick drop in the greenback from around CAD1.3400 to CAD1.3320. Its lowest level in a month and the US dollar has not traded below CAD1.33 since mid-February. However, the heavier tone in S&P 500 and broadly firmer US dollar saw it recover to almost CAD1.3400. Both ends of the recent range (~CAD1.33-CAD1.3650) have recently been tested and they held. Prudence dictates that we assume the range holds until proven otherwise and that means opportunities exist as the range extreme is approached. The US dollar recorded today's low so far in the European morning near CAD1.3335. Initial resistance is seen in the CAD1.3360-80 area. The greenback was sold to nearly MXN17.3055 yesterday and recovered to settle around MXN17.3650. It has not been above MXN17.37 today. Although the exchange rate is at levels not seen since 2016, as the dollar has fallen, volatility has eased. One-month implied vol is near 9.7% now and is approaching the low for the year set in early February closer to 9.3%, which matches the 2022 low. The relatively low volatility is an important consideration for carry-trade strategies. By comparison, one-month BRL vol is almost 13% and around 15.2% for the COP.

Japan's bitter memories of its decades-long battle with deflation hang heavily over the central bank's deliberations to take its first modest step away from ultra-loose monetary policy, even as inflation and wages creep up.

The appointment of Kazuo Ueda as Bank of Japan (BOJ) governor this year and mounting price pressures have fired up market chatter that the new chief might hasten an exit from the bold stimulus of his predecessor Haruhiko Kuroda.

But uncertainty over the wage outlook and emerging global economic weakness heighten the chance the BOJ will hold off tweaking its controversial yield curve control (YCC) policy at least until autumn, say three sources familiar with its thinking.

"In a country that has seen interest rates stay ultra-low for two decades, the shock of the BOJ's first move could be enormous," said one of the sources. "That's enough to make the BOJ cautious."

Japan has not seen interest rates rise since 2007, when the BOJ hiked short-term rates to 0.5% from 0.25% in a move later criticised for delaying an end to price stagnation.

Having taken part in Japan's battle with deflation as BOJ board member from 1998 to 2005, Ueda knows all too well the danger of a premature exit from ultra-loose policy.

Wary of a wobbly recovery, he opposed the BOJ's decision in 2000 to raise short-term rates to 0.25% from zero.

The bank drew significant political heat for that tightening and was forced to reverse course just eight months later and adopt quantitative easing.

Given the trauma of such ill-timed policy shifts, caution will be Ueda's priority, the sources say, suggesting an end to YCC, which caps the 10-year bond yield around zero, could be some time away. That would mean more significant policy changes are even further down the track.

"Tweaking the yield cap alone may not do much harm to the economy, as long as short-term rates are kept low," one of the sources said. "But the BOJ's long, historical struggle with deflation can't be taken lightly."

One key difference between the BOJ's and the market's thinking lies in Japan's inflation outlook.

On the surface, conditions for phasing out a portion of the BOJ's massive stimulus appear to be falling in shape.

Core consumer inflation hit 3.4% in April, holding above the BOJ's 2% target for over an year, as companies continued to hike prices for a broad range of goods and services.

Companies offered pay hikes not seen in three decades in this year's wage talks with unions, heightening hope of a sustained rise in pay after decades of stagnant wage growth.

With robust domestic demand offsetting some of the external headwinds, the BOJ is widely expected to raise this year's inflation forecasts at its next quarterly review in July.

But inflation is now less of a trigger for an exit than it was in the past, as policymakers focus on risks that could again upend the path toward a sustained recovery.

"If you know the U.S. economy could slow sharply due to aggressive rate hikes in the past, it's natural for the BOJ to be cautious about phasing out stimulus," a third source said.

Weakness in China, a major market for Japanese manufacturers, also casts doubt over whether companies can reap enough profits to sustain wage hikes next year.

To be sure, Ueda has left scope to tweak YCC in case inflation continues to overshoot the BOJ's forecasts. At his debut policy meeting in April, he removed guidance pledging to keep rates at "current or lower levels."

In a group interview last month, Ueda said the BOJ could tweak YCC "if the balance between the benefit and cost of our policy shifts."

With Kuroda's massive stimulus having failed to re-anchor inflation expectations around the BOJ's target, however, Ueda has good reason to be cautious.

Ueda last month said eradicating Japan's entrenched deflationary mindset remained a difficult challenge and warned moving too quickly on rates was more dangerous than not moving fast enough.

"The cost of waiting for underlying inflation to rise until it can be judged that 2% inflation has fully taken hold is not as large as the cost of making hasty policy changes," he said.

Worries that have dogged U.S. stocks for months are fading, pushing some Wall Street firms to raise their outlooks for equities and beckoning investors who have remained on the sidelines.

Signs of strength in the economy, relief over a deal to raise the U.S. debt ceiling and an interest rate hiking cycle that may be nearing its end have heartened investors and driven the benchmark S&P 500 up nearly 20% from its October low - one definition of a bull market.

Further gains may hinge on whether investors who cut stock allocations to the bone over the last year return to the market. Cash on the sidelines is plentiful: U.S. money market fund assets hit a new record of $5.8 trillion last month, while cash levels among global fund managers remain high relative to history, according to the latest survey from BofA Global Research.

And while computer-driven strategies have been piling into the market for months, according to Deutsche Bank, positioning among discretionary investors -- a cohort that includes everyone from active mutual funds to retail investors -- is lighter than it has been 74% of the time since 2010, the bank's data showed.

"There certainly seems to be a bit of a more optimistic ring to the market," said Chuck Carlson, chief executive officer at Horizon Investment Services. "Further strength might beget further strength because of the FOMO factor," he added, using the popular acronym for "fear of missing out."

A stronger-than-expected U.S. economy is one reason for investor optimism, after many spent months girding for a widely expected recession.

Data on Friday showed U.S. job growth accelerated in May, even as the unemployment rate rose to a seven-month high – bolstering the case for those betting the Fed can contain inflation without badly damaging growth.

"Inflation has clearly subsided, and yet labor market strength has remained intact," wrote BMO Capital Markets chief investment strategist Brian Belski in a recent note.

While a severe recession was his biggest worry at the start of the year, now “the anticipated recipe for disaster is simply not present.”

BMO raised its year-end S&P 500 price target to 4,550 from 4,300. The index, which is up 11% year-to-date, closed at 4,267.52 on Wednesday. It is up 19.3% since Oct 12.

Other firms that have issued rosy targets in recent days include Evercore ISI, which now sees the S&P 500 at 4,450 at year end, up from its prior view of 4,150, and Stifel, which anticipates the index will reach 4,400 by the third quarter. BofA late last month raised its year-end target for the index to 4,300 from 4,000.

Another key risk dissipated last week when Congress passed a bill to suspend the debt ceiling, averting a potentially catastrophic U.S. default.

“Moving past the debt ceiling and at least having some economic data that looks ok is actually enough to get some people interested,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

Lerner on Monday shifted his expected S&P 500 range for this year up to 3,800-4,500, from 3,400-4,300 previously, citing improving earnings trends among other factors.

At the same time, investors have been cheered by signals that the Fed is unlikely to deliver many more of the rate increases that shook markets over the last year. Bets in futures markets showed investors projecting the Fed would leave rates unchanged at its June 13-14 monetary policy meeting and raise them only once more this year.

Of course, plenty of skeptics remain.

John Lynch, chief investment officer for Comerica Wealth Management, said the S&P 500 could retest its October lows with "elevated interest rates and tighter credit standards weighing on economic activity for the remainder of the year."

Another worrisome signal is the fact that the S&P 500's gain this year has been spurred by just a handful of megacap stocks like Microsoft and Nvidia, which have been fueled in part by excitement over advances in artificial intelligence, while large areas of the market have languished.

For Hans Olsen, chief investment officer at Fiduciary Trust Co, that's an ominous sign. Olsen believes signals such as the inverted yield curve show recession risks remain “pretty high” and his firm is maintaining higher than typical cash levels.

“We have one powerful rally inside a bear market that has yet to be fully resolved,” he said.

If they need any evidence that the current tightening cycle is not of the usual type, rates markets only have to look at the Bank of Canada's 25bp hike yesterday. It was a move that surprised the majority of economists and came after the bank stood pat since last hiking 25bp in January.

The Bank of Canada has led Fed policy in many ways, when it came to starting quantitative tightening or reverting to larger hikes. Now it may well have jumped ahead with the "skip" narrative, just when FOMC members are mulling a pause of their own. While it was previously tempting for markets to read any pause already as the end of the tightening cycle, it shows that an adverse turn of the data can require central banks to tighten the policy screws further.

With regards to the markets' pricing of the Fed, the implied probability of a hike next week increased moderately to 30%. The probability of a July hike briefly spiked above 90% before falling back to 80%, not far from where it sat before. Yet further out the SOFR OIS forwards for year-end are now back at their highest levels since March at just above 5%.

However, it was longer rates in the 5- to 10-year area that underperformed, with 10Y USTs rising more than 12bp to close in on 3.8%. While the BoC's decision delivered the decisive push, the rise in yields already started earlier. That may also be owed to the prospect of faster paced Treasury issuance after the lift of the debt ceiling weighing on markets.

True, the rebuild of the Treasury's cash balance as indicated yesterday to US$425bn by the end of June will mostly come from additional bills issuance, but early next week markets also will face 3Y and 10Y Treasury auctions on Monday and a 30Y auction on Tuesday. It means the bond sales will come around the crucial U.S. CPI release and just ahead of the FOMC decision, volatility events that may warrant additional price concessions.

In EUR rates markets as well, just ahead of the upcoming ECB meeting, worries about inflation continue to outweigh the impact of softer data. Market have been close to fully pricing a June hike for a while now and see at least one more hike until September. They see a 20% chance that we will have a third hike, reflecting the recent return of speculation that the ECB's deposit rate could reach the 4% handle.

The ECB's Schnabel and the Dutch central bank's Knot were the latest to say more tightening was needed. Schnabel cautioned "given the high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much".

Our own economists also think a hike next week looks like a done deal. More interesting is what the ECB will signal around the further path ahead. Given the current tightening bias evident in minutes of the last meeting and recent commentary as well as the still painfully slow decline in inflation the door should be left open to deliver more. A second hike in July looks likely. A third in September is possible, but not yet the base case.

The Bank of Canada's resumption of rate hikes also lends credibility to the skip narrative that Fed officials have increasingly been pushing last week. Despite all positive signs on the inflation front and weaker data, the concern clearly is that central banks may still need to do more.

Technical factors like the Treasury supply packed into early next week just ahead of the Fed decision can add a bearish tilt to the market until then, and at least to some added volatility.

Main highlight on the data front are the weekly U.S. initial jobless claims. Consensus here is for little change which would indicate a still relatively tight job market. In the eurozone we will get the final first quarter GDP figures.

Supply certainly has been a theme in eurozone rates markets, too, especially with Spain printing a €13bn 10Y bond which added to the widening of periphery bond spreads. After recent busy primary markets, only Ireland is scheduled to be active - with two bond taps in the sovereign space today.

Yesterday's surprise rate hike by the Bank of Canada (BoC) triggered quite a clean reaction in FX markets. Of course, the Canadian dollar rallied on the view that the BoC had unfinished business when it came to tightening. But the broader reaction was for short-dated yields to rise around the world, for yield curves to invert further, and for the dollar to strengthen. USD/JPY rose about 0.8% after the BoC hiked. The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too.

This endurance of this late cycle dollar strength is therefore the key story for this summer. For the near term, it looks like the dollar can hold the majority of its recent gains into next Wednesday's FOMC meeting - though the release of the U.S. May CPI next Tuesday will be a big market driver too. Our bigger picture call remains that the dollar will embark on a cyclical bear trend in 2H23 - probably starting in 3Q - though the risk is that this gets delayed.

This brings us to our second key observation which is that declining levels of cross-market volatility continue to favour the FX carry trade. Somewhat amazingly the VIX index - implied volatility for the S&P 500 equity index - has fallen below not just the 22 February pre-invasion levels but also below the March 2020 pre-pandemic levels. As is the case with low rates and FX volatility, presumably investors believe that policy rates will not be moving too much this year - perhaps a little higher and then a little lower. Lower volatility levels are favouring the carry trade which in the EM world favours the Mexican peso and the Hungarian forint and in the G10 space - as Francesco Pesole points out - favours the Canadian dollar. An investor selling USD/MXN six months forward at the start of the year would have made close to 16% by now.

Expect these core trends to continue for the near term. The data calendar is light today and we suspect a slight pick-up in initial claims will not be enough to move the needle on the dollar. Expect DXY to linger around 104.

EUR/USD softened on the BoC rate hike yesterday as the implications for Federal Reserve policy proved the larger driver. The softening in EUR/USD did mask some further hawkish rhetoric, where the European Central Bank's influential Isabel Schnabel was still sounding pretty hawkish. Please see our full ECB preview here. Today's session sees some revisions to eurozone 1Q GDP data - expected to be revised down after German figures. However, the market still looks comfortable pricing in two further 25bp ECB rate hikes by the late summer. Expect EUR/USD to remain becalmed well within a 1.0650-1.0750 range.

Elsewhere, we hear from Swiss National Bank (SNB) President Thomas Jordan at 1405CET today. The SNB is widely expected to raise the policy rate by 25bp to 1.75% on 22 June. Recent CPI releases have, though, shown core inflation dipping below 2.0% - a move that reduces the need for the SNB to drive the nominal Swiss franc any stronger. EUR/CHF could drift to 0.9800 should President Jordan acknowledge that better CPI trend today.

We have updated our calls on Norges Bank and NOK. As discussed in this note, we now expect Norges Bank to take rates to 3.75% (two more hikes from current levels) on the back of NOK's weakness and we see non-negligible risks of a 4.00% peak rate. The short-term outlook for the krone remains clouded: the threat of more Fed tightening is keeping the illiquid and high-beta NOK under pressure, and domestically Norges Bank daily FX purchases have only been trimmed marginally in June. We expect rate hikes and potentially larger cuts to FX purchases later this year to pair with a solid set of fundamentals and a stabilisation in risk sentiment and bring EUR/NOK closer to 11.00 in late 2023.

EUR/GBP volatility remains near recent lows and spot trades well within a tight 0.8570-0.8640 range. Second or third-tier UK data has been quite mixed recently, but the main event on the data front will be next Tuesday's release of jobs and wages data. We see that as a negative event risk for sterling, where wage growth could continue to slow and take some of the steam out of the 100bp+ Bank of England tightening expectations still priced in by money markets. GBP/USD to trade well within a 1.2400-1.2500 range.

Yesterday's press conference by the National Bank of Poland (NBP) governor delivered a dovish tone. The governor mentioned during the press conference that inflation could fall below 10% year-on-year in September, which is likely the main condition for a rate cut. We expect this condition to be met by that time, which could open the door for monetary policy easing. Our economists see the chances of a post-summer rate cut increasing from 30-40% to 50% after this central bank meeting. However, this move is roughly priced into the rates market.

May inflation in Hungary will be released today. We expect a fall from 24.0% to 22.1% YoY, slightly below market expectations, mainly on easing price pressures in food, fuel, and durables. Services inflation, however, will remain strong, thus core inflation on a monthly basis will stay high around 0.8%. And later today, we will see the May state budget result in Hungary, which like the rest of the region, is underwater, raising questions about meeting the target this year.

In the FX market today, rather than a local story, we will see a follow-up of yesterday's movement in core rates, which translated into lower interest rate differentials across the region, indicating weaker FX in Central and Eastern Europe.

Uh oh. The surprise 25bp hike from the Bank of Canada (BoC) yesterday sent shockwaves across the financial markets. BoC decision to resume its rate hikes after a two-meeting pause and the surprise 25bp from the Reserve Bank of Australia (RBA) a day earlier fueled the central bank hawks around the world and boosted the Federal Reserve (Fed) rate hike expectations as well.

Now it's important to note that the U.S. Fed isn't a fan of this kind of surprises, so the pricing of expectations before meetings are generally accurate. Activity on Fed funds futures now gives around one third chance of a 25bp hike at June meeting, and a two thirds chance for at least a 25bp hike when the FOMC meets in July.

As a result, the U.S. 2-year yield, which captures the Fed rate expectations is under a renewed pressure above the 4.50% mark, while the U.S. 10-year yield is around 3.80%.

If the Fed expectations become more hawkish, we will likely see the 2-year yield headed to 5%, but the upside potential in the 10-year yield is much less, as the aggressive rate hikes coming from once-too-patient-but-now-impatient policymakers will push the world economy into a deeper chaos in H2, Higher recession odds for a potentially deeper recession will inevitably resurface and further widen the gap between the 2 and 10-year papers.

The surprise RBA and BoC hikes, and the rising yields are bearish for stock valuations. The TSX gave back 0.36% yesterday, the S&P500 rebounded lower by a similar amousummer'sm last summer peak levels, while the rate-sensitive Nasdaq dived 1.75%, as the overbought names of the past weeks, like Nvidia for example, were rapidly sold to lock in profits. Nvidia lost more than 3% yesterday.

But the Russell 2000, which has underperformed the S&P500 and Big Tech stocks since the bank crisis, jumped almost 2.50% yesterday after a 2.70% gain recorded the day before. According to the Bear Traps Report, there have been only two days since 1990 when the S&P500 gained less than 0.25% and the Russell 2000 jumped more than 2.5%.

Note that, the Russell 200 rally doesn't mean that small caps could better weather the rising rates, on the contrary, small companies are more vulnerable to the rising rates and tightening credit conditions, but the surprise small cap rally could be a sign that the rally in Big Tech has certainly gone too far, and there is some rebalancing happening in the portfolios.

The U.S. dollar consolidates near the highest levels since mid-March, but hawkish bets for other major central banks keep the dollar's upside potential limited at the current levels. The EUR/USD remains bid around the 1.07 level, Cable bulls aim at the 50-DMA, near 1.2460, for a further rise toward the 1.25 mark, while the USD/JPY finds sellers at the 140 level. The data released this morning hinted at a higher Japanese trade surplus in April, while the Q1 growth was revised higher.

In Turkey, the lira lost 7% against the U.S. dollar yesterday, as the Treasury and Finance Ministry, under the leadership of freshly appointed Mehmet Simsek asked the central bank to wane its FX interventions. Interventions apparently resumed after the USD/TRY hit the 23 mark, yet the recent jitters in the Turkish lira is a sign that Turkey will abandon its costly and unsustainably FX interventions. The risks for USD/TRY are tilted to the upside and the pair could easily jump to 30/35 if left trade free.

Elsewhere, gold is also under the pressure of rising yields and strong U.S. dollar. The price of an ounce is testing the 100-DMA, near the $1940 level, to the downside and the selloff could accelerate if support is taken out. The next reasonable target for gold bears is $1905, the major 38.2% Fibonacci retracement on November to May rally, and which should distinguish between the actual positive medium-term trend, and a bearish reversal.

In energy, U.S. crude recovered past the $73pb yesterday as the EIA data revealed a surprise 500K barrels decline in U.S. crude inventories last week. But rising rates, tightening financial conditions and rising recession worries are bearish for oil, which – on top – failed to capitalize on OPEC output cut earlier this week. Risks remain tilted to the downside. Expect strong resistance into the 50-DMA, which stands a touch below the $75pb level, with a possible return below the $70pb level.