It was a mixed week for markets in terms of the economic data and news flow. US equities started the week strong, but are still down by 0.3% over the week (and ~6% below January highs), European shares had a good rebound up by 0.9% (but are still 11% below January levels), Japanese shares were 1.8% lower, Chinese shares continued to recover up by 2.1% and Australian shares continue to outperform (mainly because of the commodities exposure), up by 1.3% this week and just ~1% below January peaks.

US 10-year yields fell to 2.3% (after getting above 2.5% last week) and 2-year yields lifted to over 2.3% this week. This means that on the 2-10 year yield measure, the US yield curve finally went negative (or inverted) although it was only brief and the 2–10-year spread is now around neutral. As we have written previously, other measures of the yield curve (like the 10-year less fed funds rate) are still upward sloping and rising (see chart below).

While many commentators and central banks are dismissing the yield curve inversion, I think there is still some relevance in its signal such as the risk of an economic downturn (or recession) in the next 12-24 months, a future bear market or a policy mistake by the central banks which means future interest rate cuts. These are all valid concerns to keep in mind for 2023.

Oil price movements have been erratic, but prices fell back down to ~$100/barrel (from ~$113/barrel last week) after US President Biden said the US would release 1 million barrels of oil a day from US reserves for 6 months, which would be the largest release (accounting for 30% of US reserves) taking US oil stockpiles back down to 1984 levels.

Other government measures to force US oil companies to increase output should help to ramp up oil production in the coming months. Other commodity prices like gas, aluminium, nickel, wheat and soybeans have all been moving lower over the past week which is good news for inflation.

The Japanese Yen depreciated to a 7-year low this week (currently at $121USD/JPY) as the Bank of Japan defended its 10-year bond-yield target (which has a cap of 0.25%) as Japanese bond yields have been rising from global inflation pressures. The AUD remains a strong performer and was up over $0.74US dollars this week, from $0.71 at the beginning of March.

The US Federal Reserve appears to be coming around to the aggressive market pricing for interest rate hikes this year. US Fed member Harker said that 50 basis points hikes are not off the table in May/June. The market is pricing in a Fed funds rate over 2% by the end of the year (currently at 0.38%), which means a rate rise at every meeting this year, with at least one of those being a 50-basis point increase.

What to watch over the next week?

In Australia, March ANZ job advertisements are likely to show further strength, the Melbourne Institute March inflation gauge will give a guide to March quarter inflation. The April RBA Board meeting could see some more hawkish language adopted from the central bank as it starts to become more comfortable with the idea of hiking interest rates this year. The RBA will detail the key financial risks to households and businesses in Friday’s semi-annual Financial Stability Review. The details around risks to borrowers in housing market will be most interesting. And we think that the February trade balance will decline on January numbers, to about $11bn (from $12.9bn in the prior month) from lower export growth.

In the US, the March jobs data is released tonight. Payrolls are expected to rise by a solid 490K which would push the unemployment rate down to 3.7% (from 3.8%). Employment growth in the US is still not back to its pre-Covid levels. Other US data next week includes the March manufacturing ISM (expected to remain strong at an index level of 59), February factory orders (likely to fall by 0.6%), the February trade balance (consensus looking for a small decline in the trade deficit to $88.6bn) and the FOMC meeting minutes for the March meeting when the Fed raised interest rates for the first time this cycle.

In the Euro area, consumer price data for March is released tonight and is expected to show strong monthly growth of 1.8% or 9.7% higher than a year ago. Core inflation should be much lower at 3.1% over the year. The February producer price index is released later this week and along with February retail sales.

In China, the non-official Caixin services PMI is likely to fall below 50 in March because of the Covid-related lockdowns.