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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. 

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%.  

FOMC minutes highlighted a more aggressive plan for policy normalisation. The market re-priced odds at 60% chance of the Fed raising interest rate by 0.25% at its March meeting. The minutes of the 15 December meeting released yesterday afternoon, suggested three rate increase this year and three the following year as inflation concerns deepened. In our view the market is getting ahead of itself and the Fed could see some comfort in keeping a more accommodative policy if markets and the overall macro environment weakens. The market could be setting itself up for a favorable surprise by the Fed.

💡 Bets on the USD strengthening reach highest since June 2019. Investors are positioning heavily into the USD, on expectations that the Fed will withdraw stimulus next year and begin a number of rate hikes. The path to rate hikes will be dependent on the state of the US economy and inflation. Investors could also be finding comfort in holding USD as an alternative to other assets more vulnerable to a pullback. The Dollar is also finding buyers amid very high inflation rates in some regions such as Turkey, most recently.