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Yields on US 10-year Treasury Note is causing havoc on markets, up 4-5bp at 1.83%, after retreating from 1.857% at one point. Investors are expecting interest rates to rise and its putting pressure on the yield curve. The rise in borrowing costs is pressuring down stocks globally this morning. The Nasdaq is lower by 1.7% and the S&P 500 by 1%. Europe's Stoxx 500 is down by 1%. As we are entering earnings season, stocks are particularly sensitive as companies resume buybacks only after earnings are out. More visibility from central banks would be welcomed by markets and possibly lower the volatility. 

China's economy expanded 1.6% on a quarterly basis in 4th quarter of 2021. However, retail sales disappointed as they increased 1.7% year on year in December, versus the 3.8% expected, and down from 3.9% growth in November. With prices stable, China's central bank, the PBOC is shifting the focus to boosting economic growth. It responded with a rate cut this morning, lowering the interest rate on around USD110.2 billion worth of 1-year medium-term lending facility loans to some financial institutions by 10bp to 2.85%. The central bank also lowered borrowing costs of 7-day repos by 10bp to 2.10%. We believe it is likely the POBC will continue to act to support its economic growth, as it attempts to manage a soft-landing for its cooling property market. China's CSI 300 closed 0.86% higher today, but it is still down 13.6% from where it was a year ago. 

The US Core CPI rose modestly, +0.6% MoM (vs 0.5% forecasted) and +5.5% YoY (vs 5.4% forecasted). Shelter, and used cars and trucks were the largest contributors, while energy prices had their first decline in December. The Dec CPI number is better than "feared”, but it is unlikely to alter Fed policy for the moment. However, the news is well perceived by markets as both the S&P 500 and the Nasdaq are moving higher.

Fed Chairman Powell came across as more dovish than expected by the market. He reassured markets mentioning decisions around balance sheet reductions will take 2-4 meetings. Powell also said inflation should remain above target until middle of the year, although inflationary pressures could last well into next year. A slightly more dovish tone was enough to make the tech-heavy Nasdaq pivot from its 0.60% intraday loss to gains of 1.2%.  

EUR/USD futures spread for December 2022 shows traders expect the US Federal Reserve to hike 4 times through the year, pricing a hike in March at an almost certainty. Hedging costs for Euro investors are rising as market participants increasingly bet on the Fed taking a firmer action to slowly withdraw its record monetary stimulus, in an attempt to address concerns of inflation. Similarly, the rise in the yield of the US 10 Year Treasury Note has not gone unnoticed, causing markets to whipsaw intraday yesterday. Investors are nervous that higher yields could pressure down asset prices, especially those that have benefitted most from record low interest rates.