Authored by Gary Bai via The Epoch Times,

Former President Donald Trump on Feb. 21 welcomed the idea of requiring those intending to run for U.S. president to go through mental competency examination.

“ANYBODY running for the Office of President of the United States should agree to take a full & complete Mental Competency Test simultaneously (or before!) with the announcement that he or she is running, & likewise, but to a somewhat lesser extent, agree to a test which would prove that you are physically capable of doing the job,” Trump, 76, said on his social media platform Truth Social on Tuesday.

“​Being an outstanding President requires great mental acuity & physical stamina. If you don’t have these qualities or traits, it is likely you won’t succeed. MAGA!​” he wrote.

Trump echoed earlier remarks by former South Carolina Gov. and U.N. ambassador Nikki Haley, who announced her 2024 presidential bid on Feb. 14, about requiring mental competency tests for politicians over 75.

Haley, 51, threaded her Feb. 15 presidential campaign kickoff speech with the theme of a “new generation” of leadership, distinguishing her relatively young profile from those of her competitors, including Trump, potentially President Joe Biden, and others in Congress who are over the age of 70.

According to a Business Insider report, about 23 percent of Congress is currently over 70 years old, marking the highest percentage in U.S. history.

While roughly half of the U.S. population is aged 38 and younger, Congress only has 5 percent of its members within that demographic, the study found, with a median age of 61.5 in 2020.

“In the America I see, the permanent politician will finally retire,” Haley said in her concluding remarks, speaking to an audience at the Charleston Visitor Center.

“We’ll have term limits for Congress, and mandatory mental competency tests for politicians over 75 years old.”

Haley’s statements have received mixed responses. Former presidential candidate Sen. Bernie Sanders (I-Vt.), 81, called Haley’s remarks “absurd” when he appeared on CBS’s “Face the Nation” on Feb. 18.

Haley dismissed Sanders’s criticisms, saying it is “exactly what a career politician and socialist would say,” in a statement to The Epoch Times on Feb. 20.

The issue of a president’s age began floating around the time of the 2020 presidential election when some frontrunners—including Sen. Elizabeth Warren (D-Mass.), Sanders, and Trump—were over 70. Then-presidential candidate Joe Biden became the oldest in American history to run at the age of 77.

Since Biden announced his presidential bid, and after his inauguration, many questioned his cognitive state, often citing his public gaffes as signs that he is unfit to govern.

Last October, a month before he turned 80, Biden said it is “totally legitimate” for voters to factor in his age in judging his capacity to govern and that people should decide whether his abilities are adequate for the job.

On the same topic, Trump said in 2022 that Biden’s age did not make him an “old man.”

“President Biden is one of the oldest 79s in History, but by and of itself, he is not an old man,” Trump wrote on Truth Social on July 10, 2022.

Co-founder of GQG Partners, Rajiv Jain, is being dubbed the “anti Cathie Wood”. He doesn’t spout off on Twitter and he invests in boring, cash generative companies, instead of speculative technology names. 

His portfolio is laden with names in oil, tobacco and banking, Bloomberg wrote in a recent profile. But this strategy has been a success. Jain has built a $92 billion fund in less than 7 years since he started. Three of its four funds beat the benchmark in 2022, the report says. 

Jain’s Goldman Sachs GQG Partners International Opportunities Fund has gained 10.8% per year since its inception in December 2016, utilizing his strategy of taking large positions in individual names. He calls himself a true “quality growth manager” while referring to his competition as “quote-unquote quality growth managers.” Bloomberg says that he thinks of them as “imposters”. 

Jain doesn’t mind taking larger swings at companies with impenetrable balance sheets. “We try to take less absolute risk. The businesses we own generate lot of free cash flow. So the risk of us losing on an absolute basis is a lot lower. But sometimes that means you have to take more relative risk,” he said.

He told Bloomberg: “These kinds of volatile years actually allow you to differentiate a little bit more. A lot of ‘quality growth’ managers basically blew up. We found out whether they really own quality.”

This year his international fund is up just 3.4% versus the benchmark’s 7.8%, as 2023 started with a respite for speculative technology names that the market hasn’t given back yet. “I’m not a happy camper these days,” he says. His strategy is to invest in 40 to 50 large caps in his international fund, compared to the thousands that are included in the benchmark. 

Two of his largest holdings are British American Tobacco and Philip Morris International. 

Jain started cutting his exposure to technology in late 2021, exemplifying one trait that he thinks sets himself apart from other managers: the ability to recognize mistakes and change course. “Investing is a game of survival because most people won’t survive in the long run. So that should be the mindset rather than trying to win all the time. It’s as much about avoiding losing rather than trying to win,” he told Bloomberg. 

Colleagues describe him as risk-adverse. Gregg Wolper, a senior analyst at Morningstar, said: “He is so much more cautious than other growth managers. He has a combination of confidence and yet some humility in understanding that he might be wrong about something,” he continued. 

Authored by Gary Bai via The Epoch Times (emphasis ours),

Florida Gov. Ron DeSantis weighed in on President Joe Biden’s unannounced visit to Ukraine on Feb. 20, criticizing the President’s “blank check” promise to the European nation and noting that the communist regime in China is greater threat to the values that the United States and its global allies uphold at this time.

DeSantis was speaking to hosts of Fox News’s “Fox and Friends,” which aired around the time the governor spoke at a pro-law enforcement event held in a catering hall in Staten Island, New York, this morning.

“They have effectively a blank-check policy with no clear, strategic objective identified, and these things can escalate, and I don’t think it’s in our interests to be getting into a proxy war with China, getting involved over things like the borderlands or over Crimea,” DeSantis said, referring to Biden’s exchange with Ukrainian president Volodymyr Zelenskyy, during which the U.S. president pledged an additional half-billion dollars.

“So I think it would behoove them to identify what is the strategic objective that they’re trying to achieve, but just saying it’s an open-ended blank check, that is not acceptable,” he continued.

According to a January report by the non-profit Committee for a Responsible Federal Budget, the U.S. Congress approved more than $113 billion of military and non-military assistance to Ukraine in 2022—more than half of Ukraine’s Gross Domestic Product before the war. This amount included $67 billion for defense-related items and $46 billion for humanitarian and economic aid.

The governor added that the scenario of Russia “steamrolling” into NATO countries “has not even come close to happening,” adding that Russia has shown itself to be a “third-rate military power.”

“I think they’ve suffered tremendous, tremendous losses,” DeSantis said, referring to Russia.

The governor added that he believes a major factor causing the war in Ukraine was Russia’s perception of the Biden administration’s “weakness,” and took a swipe at the administration’s handling of the border crisis and its response to China’s surveillance balloon that flew over the United States.

“I don’t think any of this would have happened, but for the weakness that the president showed during his first year in office, culminating, of course, in the disastrous withdrawal in Afghanistan,” the governor said.

“So I think while he’s over there, I think I and many Americans are thinking to ourselves, okay, ‘He’s very concerned about those borders halfway around the world. He’s not done anything to secure our own border here at home.’ We’ve had millions and millions of people pour in, tens of thousands of Americans dead because of fentanyl, and then, of course, we just suffered a national humiliation of having China fly a spy balloon clear across the continental United States,” DeSantis added.

‘Not Same Level’ With China Threat

According to DeSantis, Russia—in comparison to the Chinese regime—does not pose as serious of a threat to America.

“I don’t think that they are the same threat to our country, even though they’re hostile,” DeSantis said of Russia. “I don’t think they’re on the same level as China.”

Currently, Republican politicians in Congress diverge views on how the United States should gauge Ukraine’s strategic priority.

On one side, lawmakers such as Sen. Mitch McConnell (R-Ky.) and Sen. Lindsey Graham (R-S.C.) ardently support providing military and other aid to Ukraine and have expressed the view that U.S. involvement in the Russia-Ukraine war serves to demonstrate the U.S.’s resolve in countering the authoritarian axis.

On the other hand, lawmakers such as Sen. Josh Hawley (R-Mo.) and House Speaker Kevin McCarthy (R-Calif.) are wary of giving too much assistance to Ukraine, saying it would worsen inflation or curtail the Unites States’ ability to respond to a potential Beijing invasion of Taiwan. DeSantis appears to fall closer to this end of the spectrum.

According to U.S. Secretary of State Anothony Blinken, China could be considering ramping up its military presence in the Russia-Ukraine war.

“[F]or the most part, China has been engaged in providing rhetorical, political, diplomatic support to Russia. But we have information that gives us concern that they are considering providing lethal support to Russia in the war against Ukraine,” Blinken told ABC’s “This Week” program on Sunday, after meeting with China’s top diplomat, Wang Yi, at the Munich Security Conference.

“There are various kinds of lethal assistance that they are at least contemplating providing, to include weapons,” Blinken said.

The Jan 31-Feb 1 FOMC increased the fed funds rate by 25bp to 4.5-4.75%. They left unchanged the sentence in the statement that “ongoing” rate hikes will be appropriate, and Chair Powell did not express concern about the recent weakness in the survey data. At the same time the Fed did switch language on guidance from the “pace of future increases” to the “extent of future increases”, suggestive of debate moving from the size of hike increments to how many hikes remain in the cycle, a dovish offset to the continued use of “ongoing increases”. As Goldman notes, the Committee made it clear that it sees further hikes as fine-tuning. Last week, in light of the stronger growth and firmer inflation news, several banks, including Goldman, BofA and DB added an additional 25bp rate hike to their Fed forecasts.

Elsewhere in the statement, the Fed acknowledged that inflation has eased somewhat, but remains elevated, while it also dropped the mentioning of public health as a factor in the bank’s policy assessment. Chair Powell sat on the fence on many topics he was asked about in his post-meeting press conference, rather than cut off his options. The Fed Chair confirmed that the disinflation process was underway, albeit he was eager to highlight that core services inflation, ex-housing, had not shown progress. He believes that policy is still not ‘sufficiently restrictive’, but left optionality by stressing data dependence, later saying that it is possible that the Fed updates its policy path if the data came in differently from what it expects. Powell said the Fed has not yet made a decision on the terminal rate, and that it will look at the data between now and the March SEPs. The Fed chief sees a path to getting inflation to 2% without significant economic decline, though it could take more slowing in the economy than it expects.

Courtesy of Newsquawk, here is a detailed preview of what to expect in today’s 2pm release of the FOMC Minutes.

DATA: Many will consider the February minutes as stale as recent US data has been on the hot side, including the January jobs, CPI, and retail sales reports. These were released after the latest FOMC meeting and will not have been a discussion for the Fed, where instead the minutes will reflect a period of time when officials were gaining confidence in calling out the beginning of the “disinflationary process”, right before the labour market showed a material retightening with no signs of cooling economic activity after a mild slump in December.

MAGNITUDE: Although the latest 25bp hike from the Fed was a unanimous decision among the voters, commentary since then (in wake of the hot data) has seen some of the non-voting hawks, Mester and Bullard, state there was a compelling case for a 50bp hike in February. The minutes will be viewed to see if there was much more appetite among the FOMC for a larger 50bp move in February, and the hurdles for returning to the higher magnitude going forward. However, on the flip side, with the slight tweak to guidance from “pace of future increases” to the “extent of future increases”, commentary on conditions for a pause, or how many more hikes are needed will also be eyed, but likely considered stale given the data since. SGH Macro’s Tim Duy writes the minutes “will likely reveal that FOMC participants believed that stepping down to a pace of 25bp would allow the Fed to respond flexibly to incoming data”.

PEAK RATE: The Fed has signaled more rate hikes are coming with the December Median dot plot penciling in the terminal rate at 5.00-5.25%, suggestive of two more 25bps hikes before they take a pause. Money markets are currently pricing a peak rate of just above 5.25%, after a dramatic hawkish repricing in wake of the January NFP report. Amid some post-FOMC chatter of returning to a 50bps hike, with the caveat that those calls are from a hawkish minority, the minutes will be eyed for any hints of a higher terminal rate, albeit this seems unlikely given the meeting took place before the recent hot economic data. However, the minutes may contain details about the conditions required to raise their planned terminal rate ahead of the March 21st/22nd FOMC and accompanying Dot Plot.

Authored by Michael Ryall and Siri Terjesen via The Epoch Times,

Two weeks ago, Project Veritas generated global headlines by exposing a Pfizer employee who claimed that the company was allegedly exploring plans to mutate the coronavirus themselves through “directed evolution” and profit from it. This week, Veritas is again on the front pages, this time for a very public, board-level fracas resulting in the unceremonious departure of Veritas’s dynamic founder CEO James O’Keefe.

Watching this drama play out, one question at the top of everyone’s mind is whether Veritas can survive without O’Keefe.

As researchers in corporate governance and strategy, we have analyzed large datasets on founder CEO exits as well as written individual case studies on the subject. In our judgment, O’Keefe’s departure will effectively end Project Veritas.

• First, Project Veritas is an exemplar of an organization whose brand is the founder CEO. O’Keefe’s name, personality, and leadership style are inextricably integrated into the public perception of Project Veritas—the courageous, hard-hitting, late-hours, abrasive, and revolutionary news organization in the image of O’Keefe distinguish Project Veritas from countless other news and political organizations.

• Second, in an age of hard-hitting journalism and politics, stakeholders aren’t just willing to tolerate, but actively seek leaders with a strong work ethic, a willingness to use unconventional tactics, and a high tolerance for confrontation, all of which are closely linked to the organization’s mission. For example, Apple co-founder Steve Jobs’s reputation as a charismatic, driven-to-perfection, risk-taking genius was matched by his impatient and petulant personality. Jobs’s serious disagreements with the board of directors in 1985, nine years after co-founding Apple with Steve Wozniak, led to Jobs’s departure. Apple survived, but didn’t perform at the same levels until Jobs returned in 1997, first as adviser and later as CEO.

• Third, the founder imprint is particularly apparent in non-profit 501(c)3 and (c)4 organizations, which rely heavily upon motivated donors. For them, a visionary leader, a closely aligned mission, and a track record of success are paramount. O’Keefe’s success at the helm of Project Veritas is clear, building revenues from $738,000 in 2012 to $22 million in 2020.

Conversely, there are countless examples of non-founder CEOs whose departures did little to change the trajectory of their organizations. Among non-profit examples, Young Americans for Liberty (YAL)—founded by Jeff Frazee in December 2008— weathered the storm when then-CEO Cliff Maloney was placed on leave and then terminated in January 2021. A key aspect of YAL’s survival is founder Frazee’s ongoing work as board chair and treasurer of both YAL and the YAL Foundation.

Research and anecdotal evidence suggest no clear path forward for Project Veritas without its founder CEO. The Project Veritas brand, its ability to navigate the treacherous waters of modern journalism, and its ability to acquire the resources needed to continue all walked out the door with James O’Keefe.

Read more here…

President Biden on the segment of his 4-day Ukraine and Poland trip has met with the heads of state of the so-called NATO Eastern flank countries in Warsaw.

The New York Times quite dramatically frames the meeting as follows at the opening of its reporting: “If Russian President Vladimir V. Putin were to order tanks into other European countries, the nine nations along NATO’s eastern flank would be the likeliest targets.”

Biden conveyed reassurances that the United States is prepared to speed to their defense if they come under offensive action by Moscow. These nations include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.

“These are largely the group of eastern flank NATO allies who are basically and, quite frankly, literally on the front lines of our collective defense right now,” National Security Council spokesman John Kirby had previewed. 

He said the president’s purpose in the meeting is to “reaffirm the United States’ unwavering support for the security of that alliance and trans-Atlantic unity.” It’s also meant to send a message to Putin that his country can’t intimidate these democracies, some of them relatively new and fragile.

While an “expansionist Russia” has been a key talking point in the West since the Russian invasion of Ukraine kicked off a year ago, Russia has shown no signs that it wishes to expand the conflict to other countries. The only country which has experienced significant political instability as a result of the war across its border is tiny Moldova. 

President Biden in Warsaw meeting with the Bucharest Nine — eastern-flank NATO allies with proximity to Russia.

Those states include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. pic.twitter.com/GeQqBVB39N

— The Recount (@therecount) February 22, 2023

As for the latest on Moldova, Reuters reports that Putin “revoked on Tuesday a 2012 decree that in part underpinned Moldova’s sovereignty in resolving the future of the Transdniestria region – a Moscow-backed separatist region which borders Ukraine and where Russia keeps troops.”

Interestingly, Moldovan President Maia Sandu on Wednesday invited President Biden to visit the former Soviet Republic – something which is unlikely to happen, however.

Authored by Paul Joseph Watson via Summit News,

A new study has found that people with higher cognitive ability are less likely to be concerned about political correctness and more likely to support free speech.

“Britain’s elite cultural institutions – the BBC, universities, the national trust – are dominated by the woke. Since smart people tend to get ahead in life, you might assume the woke would have higher intelligence. Not so, according to a new study,” writes Noah Carl.

Researcher Louise Drieghe and colleagues surveyed 300 American adults using the platform Mechanical Turk to measure participants’ cognitive ability by administering a test which involves accurately assigning words to pictures.

Other studies have shown that people’s scores on that test correlate closely with their scores on comprehensive IQ tests like the Wechsler Adult Intelligence Scale.

Researchers then asked participants to give their answer to statements such as, “Every individual has the unalienable right to express their thoughts freely,” and, “Censorship of speech leaves little room for debate and diverse points of view.”

Participants were also asked to respond to statements such as, “I get mad when I hear someone use politically incorrect language” and “I try to educate people around me about the political meaning of their words.”

The results show that there was “a moderate positive correlation between cognitive ability and support for freedom of speech, and a moderate negative correlation between cognitive ability and concern for political correctness. (The asterisks tell us these results are statistically significant.)”

In other words, the more cognitive ability a person displays, the less likely they are to be woke.

A harsher but somewhat accurate summary would be to say that people who embrace woke political dogmas are more stupid and gullible.

“If the woke are less intelligent, how did they gain so much influence?” asks Carl.

Perhaps they may be less intelligent but intelligent enough to know that wokeism is a creature of the establishment and by cynically embracing it then can get ahead in life at the expense of others.

Another explanation would be that people who are more intelligent are less likely to display intellectual cowardice by caving in to woke dogma and more motivated to actively resist it.

*  *  *

Brand new merch now available! Get it at https://www.pjwshop.com/

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Another day, another cold shower for long-suffering investors in what was once upon a time a greatly respected chip company.

On Wednesday morning, Intel Corp., the biggest maker of computer processors whose stock price has been eviscerated in the past two years, slashed its dividend payment to preserve cash for investment.

The company will reduce it’s quarterly payout to investors by 66% to 12.5 cents a share for holders payable June 1 – the lowest quarterly dividend since 2011 –  the chipmaker said in a statement on Wednesday. Intel’s current quarterly dividend is 36.5 cents and was projected to cost more than $6 billion in 2023.

Intel also reaffirmed its adjusted revenue forecast for the first quarter, which as noted below, is hardly something to be proud of. The company also reiterated that…

• Still sees adjusted revenue $10.5 billion to $11.5 billion, estimate $11.08 billion
• Still sees adjusted loss per share 15c, estimate loss/shr 15c

As reported last month, in its latest catastrophic earnings report Intel forecast one of the worst quarters in its history projecting revenue that would be the smallest since 2010, as a slowdown in personal-computer sales ravages the semiconductor industry.

Commenting on the dividend cut, Bloomberg Intelligence says that the move was not a surprise and had been widely expected. It notes that the cut “reflects the company’s challenge to improve cash flow despite its announced $3 billion in operational cost cuts”, and the problem is that Intel’s capex intensity leaves “little room to generate positive free cash flow for at least the next two years”

Wells Fargo also chimed in, saying that because this had been widely expected, “this announcement, while negative, will not materially change investor sentiment.”

While the dividend cut may have been expected, INTC stock still dropped, sliding to the lowest level since the end of 2022.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

By owning gold, investors are not necessarily hedging against a government default but ironically betting the Fed will increasingly misuse monetary policy to help the government avoid defaulting. That may not be the exact thesis gold investors signed up for, but there is ample evidence linking gold prices to Fed behaviors, as we will share.

Financial Mismanagement

Since 2008 government debt has risen twice as much as GDP, as shown in the first graph below. Individual and corporate debt have followed suit. The second graph below shows over $70 trillion of all debt in the U.S. economy, above and beyond annual GDP. That does not include the present value of future obligations, such as social security, which some budget experts argue can easily double the Treasury’s debt load.   

Debt has its rules that most issuers must play by. For an individual or corporation, you either pay interest and, ultimately, the principal or default. The government plays by a different set of rules. It can seemingly borrow as much as it wants. They issue debt for current expenditures but also pay for the interest on existing debt and to pay off maturing debt. This scheme works if there are willing buyers for said debt. Doing so requires a helping hand from the Federal Reserve.

The Fed does not print money to fund the government, as many believe. However, they manage interest rates and buy outstanding Treasury debt (QE). Monetary policy, including setting interest rates and QE limits the supply of bonds on the open market and the yields at which they trade. As such, the Fed directly impacts how much the Treasury pays in interest expenses for its debt.

Without the Fed’s help, interest rates would rise as the amount of debt increases versus the nation’s ability to pay for the debt.

Measuring The Fed’s Impact on Yields

Bond yields are a function of supply and demand. The demand side is largely governed by inflation. Bond investors’ appetite grows as the yield increases more than the expected inflation rate over the bond term. Conversely, in a free market, bond investors should be unwilling to buy bonds with yields below the expected inflation rate. Therefore, we can look at real yields to gauge how much help the Fed supplies to the Treasury.

The graph below shows inflation-adjusted or real 10-year UST yields and the yield and inflation expectations used to calculate them. Real yields were generally around +2.00% before the financial crisis. Such a spread aligns well with data going back to 1970. Over those fifty years, real yields averaged 2.30%. Since 2010 real yields have averaged .23%.

In other words, the Fed has likely helped the Treasury reduce its interest expense by approximately 1.75% over the last decade. 

Gold and Real Yields

Having established the Fed plays a role in reducing the Treasury’s interest expense, we turn to gold. Gold investors seem to realize that the Fed uses aggressive monetary policies to distort yields. While they have succeeded thus far, they are also devaluing the dollar’s worth. How do we know this?

The graph below shows the strong correlation between gold and real yields over the last twenty years.

The scatter plot below shows the same data in a different format. As shown, the correlation is high. Recently, as highlighted by the orange dots, the slope of the relationship has become more vertical. Essentially, gold prices are not rising or falling as much versus real yields as they did in the prior twenty years. This occurs because the relationship between gold and real yields is much less robust when real yields are positive, as they have been for the last year.

Fed’s Golden Footprint

Our thoughts in this piece tread on similar ground as The Fed’s Golden Footprint. The article highlights various periods in which the Fed let free market forces dictate yield levels and others when the Fed was unduly pressuring yields lower than they should be.  

Per the article:

• The first graph, the Pre QE period, covers 1982-2007. During this period, real yields averaged +3.73%. The R-squared of .0093 shows no correlation.

• The second graph covers Financial Crisis-related QE, 2008-2017. During this period, real yields averaged +0.77%. The R-squared of .3174 shows a moderate correlation.

• The last graph, the QE2 Era, covers the period after the Fed started reducing its balance sheet and sharply increasing it in late 2019. During this period, real yields averaged +0.00%, with plenty of instances of negative real yields. The R-squared of .7865 shows a significant correlation.

The bottom line, gold prices are highly correlated with real yields when real yields are near or below zero. The correlation is negative, meaning that as real yields fall, gold prices rise. Said differently, gold prices increase when the Fed enacts a monetary policy that is too stimulative given the circumstances. Other than the last year, that has been the case for most of the previous 15 years.

Summary

Gold investors are betting the Fed will continue to be negligent with its monetary policy. Without the Fed’s help, the free market would impose interest rate discipline on the Treasury and Congress. Higher rates would force our leaders to run budgets that align with the tax base.

Currently, real yields are at the highest levels in over a decade. As a result, gold has been trading poorly. Looking ahead, we must ask how long the economy can withstand high real yields. We guess economic growth will eventually falter, financial markets will swoon, the Treasury will start to balk at high-interest expenses, and the Fed will ride to the rescue. They will aggressively reduce rates to bring real yields back to zero or below in such a situation. Such a scenario bodes well for gold.

However, if the Fed maintains its hawkish stance, real yields will stay positive, and gold prices may continue to languish. Hopefully, this article gives gold investors the knowledge to make sound decisions on what environment fosters positive gold price action.

After suffering their biggest one-day drop of 2023, US futures rebounded in muted trading on Wednesday, boosted by a drop in rates (the 10Y just hit a session low of 3.92% after rising as high as 3.97%) and weakness in the dollar, even as investors awaited further clues on the direction of monetary policy from the Federal Reserve’s minutes due out at 2pm today. S&P 500 and Nasdaq futures rose 0.3% and 0.4%, respectively, at 7:45am ET; sentiment was boosted by a CNBC appearance of the Fed’s “trial balloon” speaker, St Louis Fed president James Bullard, who was hawkish – saying he favors hiking rates to 5.375% as fast as possible, but not as hawkish as some had feared, leading to a sharp bounce in futures just after 7am. Yields dropped, as did the dollar, while oil, gold and crypto erased earlier losses.

In premarket trading, CoStar Group led declines in US premarket trading after its annual guidance disappointed analysts and News Corp. said it’s no longer involved in discussions to sell its Move subsidiary to the real estate information and services company. Coinbase Global Inc. declined after the cryptocurrency exchange posted a $557 million loss. Here are some other notable premarket movers:

• Palo Alto shares rose nearly 10% after the cybersecurity company’s results beat across the board. Several analysts raised their price targets for the stock, saying the firm is managing macro pressures effectively and executing well on its strategy
• Keep an eye on Constellation Energy as it was cut to neutral from outperform at Credit Suisse as the broker says the green energy group’s shares now look expensive and lack near-term catalysts
• Watch Nordson after it was raised to overweight from sector weight at KeyBanc, with the broker saying a good entry point for the adhesives and sealants company has materialized following a post-earnings decline in its shares
• Morgan Stanley is constructive on US software stocks, given that the moderation in forward IT spending growth is likely to prove less severe than feared. Valuations are still near multi-year trough levels and longer-term demand trends are intact
• Keysight shares fell 7.1% in after-hours trading on Tuesday as the company’s results showed order weakness, and guidance will create cause for concern in the near term, analysts said, though they remain positive on the longer-term outlook for the electronic measurement services firm

Meanwhile disappointing earnings projections are seen everywhere. Walmart Inc. reported a weak profit outlook that fell short of analyst estimates, signaling another rocky year for the world’s largest retailer. Home Depot Inc. also released a profit-decline forecast. Only 68% of S&P 500 companies reporting results this season have beaten estimates, compared with about 80% seen during recent quarters.

Following strong business activity data on Tuesday, a classic example of “good news is bad news for markets”, stocks tumbled as evidence mounted that the Fed may have to hike even more (ignoring for a second the fact that the data is manipulated “strong” for purely political reasons and will soon slump) and prompted fears the powerful stock rally since the start of the year may be coming to an end, as hot economic indicators pressure central banks to keep monetary policy tight. And while until recently investors looked as though they may be pricing in a soft landing for the economy, that may be ending said Stephanie Niven, portfolio manager at Ninety One UK Limited, and hoping strong economic conditions may cushion higher rates.

“We will continue to see investors adjust their expectations,” said Niven. “We see a harsher economic cycle into the second half of this year, and we really think a harder landing is the likely outcome here.”

In a relatively quiet calendar, today’s main event will be the Minutes from the Fed’s Jan. 31-Feb. 1 meeting, which while naturally backward looking, may shed light on the path forward. For context, officials at the meeting voted unanimously to raise rates by just 25 basis points, moderating from a half-point hike in December after four 75-bp increases. The policy statement said the “extent of future increases” will depend on a number of factors including cumulative tightening of monetary policy, wording Fed watchers viewed as a signal the central bank may stick with smaller moves. Watch the minutes for insight into whether a larger hike is still on the table, which in turn may mean the Fed’s terminal rate is higher than some expect.

“Investors are waking up to a stark realization that the Fed’s work is not done, and that interest rates may have to be hiked even higher to cool hot inflation,” Susannah Streeter, the head of money and markets at Hargreaves Lansdown Plc, wrote in a note. “Waves of exuberance, which have propelled equities higher since the start of the year, have turned into tides of disappointment and apprehension about the difficulties that still may lie ahead for the mighty US economy.”

A rocky geopolitical outlook has not helped. President Vladimir Putin said Russia will suspend its observation of the New START nuclear weapons treaty with the US, a decision Secretary of State Antony Blinken called “irresponsible.” President Joe Biden hit back at Putin, saying he would never win his war in Ukraine.

In delayed response to yesterday’s US slump, European stocks fall for a second day after disappointing corporate earnings gave investors another reason to be cautious besides the prospect of tighter monetary policy. The Stoxx 600 is down 0.9%, headed for a second-day loss, though it came off the day’s lows. Lloyds Banking Group Plc dropped, weighing on the FTSE 100 Index, after results and guidance for 2023 came in below analyst estimates, despite announcing a £2 billion ($2.4 billion) share buyback. Miner Rio Tinto Plc fell after reporting lower than expected profit and slashing its dividend due to weak demand for metals in China. Here are some of the biggest movers on Wednesday:

• Lloyds Banking Group shares fall as much as 3% after the lender reported fourth-quarter results and guidance that were mixed with the bank affected by competition in the mortgage market
• Rio Tinto shares slip as much as 3.2% after the mining conglomerate slashes dividends and reports lower-than-expected profits, hurt by weaker demand and higher costs
• Grifols shares fell as much as 8.2%, the most intraday in four months, after the Spanish blood plasma company said executive chairman Steven F. Mayer resigned after four months in the job
• Covivio shares fall as much as 5.4%, the most since December, with analysts saying the French real estate firm’s guidance is soft and that its dividend is lower than expected
• Korian shares fell as much as 20%, set to close at their lowest level since 2006, after the French care home operator reported 2022 full year results that came short of analysts’ expectations
• Siegfried shares fall as much as 11%, the most since 2015, after the Swiss pharma company delivered an outlook analysts considered cautious given its strong performance in 2022
• Danone shares rise as much as 2.8% in early Paris trading, before paring gains, after reporting full-year recurring operating income that beat estimates
• Wolters Kluwer shares rise as much as 3.9%, the biggest intraday climb since October, after the information services company forecast organic sales growth this year will be in-line
• UCB gains as much as 4.9% after the Belgian pharmaceuticals firm reported better-than- expected earnings
• BE Semiconductor gains as much as 9.9% after reporting fourth-quarter orders that blew past analyst estimates
• Stellantis shares rise as much as 3.4% to the highest since March 2022 after the carmaker’s full-year results beat expectations and it announced a buyback of as much as €1.5 billion

Earlier in the session, Asian stocks declined for a second day after the aforementioned jump in US Treasury yields undermined confidence in the equity market’s advance this year, with shares in Hong Kong falling to the brink of a correction. The MSCI Asia Pacific Index fell as much as 1.4% to its lowest level since Jan. 9, with TSMC and Tencent among the heaviest drags on the gauge. Shares in Australia, Japan and mainland China slipped, while losses in Hong Kong’s Hang Seng Index reached almost 10% since a Jan. 27 peak. Technology stocks dropped after Treasury yields touched new highs for the year amid growing concern the Federal Reserve will continue to raise interest rates. Investors are pricing in the federal funds rate climbing to around 5.3% in June. That compares with a perceived peak of 4.9% just three weeks ago.

“We see more signs of a growth slowdown” into year end, Alexander Wolf, Asia head of investment strategy at JPMorgan Private Bank, told Bloomberg Television. Fixed income “still remains our highest conviction call, given what we’ve seen with the move up in yields, you can achieve equity-like returns.”  Read: Investors Stung by Treasuries Rout Brace for Next Fed Blow   A key MSCI gauge of Indian stocks was also on course to enter a technical correction as the selloff in Adani Group shares deepened. Indexes in Vietnam and South Korea were among the biggest decliners in the region as investors awaited the release of Fed minutes from its latest policy meeting. 

Japanese equities fell, following US peers lower on concerns of further Fed hikes and after weak corporate forecasts from US retailers Walmart and Home Depot. The Topix Index fell 1.1% to 1,975.25 as of market close Tokyo time, while the Nikkei declined 1.3% to 27,104.32. Sony Group Corp. contributed the most to the Topix Index decline, decreasing 2%. Out of 2,162 stocks in the index, 431 rose and 1,636 fell, while 95 were unchanged. “Expectations for an early halt to US interest rate hikes and cuts have faded, with the landing point for a rate hike higher than what the market expected,” said Kiyoshi Ishigane chief fund manager at Mitsubishi UFJ Kokusai Asset Management.   

India’s benchmark stocks gauge posted its biggest single-day slump this year as a selloff across global equity markets extended amid worries over interest rates staying higher-for-longer. Sentiment in India continued to be weighed down by the ongoing decline in Adani shares. The rout triggered by US short-seller Hindenburg Research’s report has now stretched to $144 billion, with the group’s flagship firm Adani Enterprises plunging 11% today. All 10 group stocks declined during the session.  The S&P BSE Sensex fell 1.5% to 59,744.98 in Mumbai, the most since Dec. 23 and is close to erasing its gains for February. The NSE Nifty 50 Index declined by a similar measure. “There is an increasing fear that the Fed may remain hawkish for a longer duration than expected, which may even force RBI to keep interest rates high,” Siddhartha Khemka, head of retail research at Motilal Oswal Financial, said in a note. All 20 sector sub-gauges compiled by BSE Ltd. declined, led by utilities, while 29 out of Sensex’s 30 companies closed lower

In FX, the dollar slid against its Group-of-10 currencies, where Sweden’s krona was the best performer followed by the yen while the Australian dollar and British pound are the weakest among. The euro fell a third day, to touch a low of $1.0630. Bund yields were a tad higher, led by longer maturities A German expectations gauge by the Ifo institute rose to 88.5 in February from 86.4 the previous month. That was better than the 88.3 median estimate in a Bloomberg poll of economists

• The Swedish krona outperformed other G-10 peers against the dollar and neared 11 per euro in the wake of comments from the new Riksbank Governor Erik Thedeen, who described underlying inflation figures in January as worrying. He also said that Sweden is currently not experiencing a housing market crash
• The pound fell, erasing some of its Tuesday gains, as investors mulled the UK economic outlook following data that showed the nation is weathering the sharpest cost-of-living crisis in generations better than feared. The gilt yield curve bear-flattened, with yields rising 3-6bps
• The yen advanced as much as 0.3% to 135.06 per dollar as the nation’s benchmark bond yield climbed back above the BOJ ceiling for a second day amid a global bond selloff. BOJ Governor nominee Kazuo Ueda is due to face confirmation hearings in the parliament this week. BOJ Board Member Naoki Tamura says that any decision on conducting a policy assessment will be made by looking at wage growth, prices and the economy. A divergence in the spot and options markets for the dollar-yen pair suggests traders are looking once again to position for possible hawkish signals from BOJ officials
• The New Zealand dollar was little changed after earlier rising as much as 0.4% to 0.6246 even as the RBNZ hiked rates by 50 basis points as expected and forecasting that it would take longer than previously expected to reach its 5.5% peak rate
• The Australian dollar was the worst G-10 performer following a smaller-than-expected wages increase in the fourth quarter. Wage price index rose 0.8% q/q (estimate +1.0%) in 4Q

In rates, Treasuries held on to modest gains as US trading day begins, after erasing declines that pushed yields to new YTD highs, with the exception of the new 2-year note. Shorter-term Treasuries rose more than longer-dated ones in a choppy session. The two-year rate slid 5 basis points from the highest level since early November. Its 10-year counterpart was 3 basis points lower. The 10-year reached 3.966% before dropping as low as 3.92%. Gilts have led European bonds lower as markets continue to price in higher terminal rates for the Bank of England and European Central Bank. UK two-year yields are up 8bps while the German equivalent adds 2bps.

In the US, the Treasury auction cycle continues with 5-year note sale at 1pm New York time, and FOMC releases minutes of Jan. 31-Feb. 1 meeting at 2pm. WI 5-year yield 4.13%; current issue traded as high as 4.185%, still more than 30bp below last year’s multiyear high, as traders are assigning higher odds to more Fed rate increases to follow the 25bp move on Feb. 1. Since then, St. Louis Fed President Bullard — appearing on CNBC — has said he advocated for a 50bp hike and might support one in March, heightening interest in whether the minutes will reveal broader appetite for reacceleration.

Oil extended its longest run of losses this year, with West Texas Intermediate contracts falling for a sixth day. The prospect of more aggressive interest-rate hikes from the Fed to quell inflation have kept a lid on prices, despite increasing evidence of a robust recovery in China following the end of Covid Zero. Crude futures decline with WTI down 0.6% to trade around $75.89, off session lows. Spot gold rose to $1,840.

Looking to the day ahead. In terms of data releases, we have the German February ifo survey which came in stronger than expected, and the France February business and manufacturing confidence indicators; in the US. the latest MBA mortgage applications dropped -13.3%, following last week’s -7.7% slide. For central banks, first and foremost we have the release of the Fed’s FOMC minutes, and we will also hear from the Fed’s Williams. Finally, we will have earnings releases from NVIDIA, TJX, Pioneer and eBay.

Market Snapshot

• S&P 500 futures little changed at 4,004.75
• STOXX Europe 600 down 0.9% to 459.50
• MXAP down 1.3% to 160.19
• MXAPJ down 1.3% to 521.69
• Nikkei down 1.3% to 27,104.32
• Topix down 1.1% to 1,975.25
• Hang Seng Index down 0.5% to 20,423.84
• Shanghai Composite down 0.5% to 3,291.15
• Sensex down 1.5% to 59,790.65
• Australia S&P/ASX 200 down 0.3% to 7,314.50
• Kospi down 1.7% to 2,417.68
• German 10Y yield little changed at 2.56%
• Euro little changed at $1.0643
• Brent Futures down 1.1% to $82.13/bbl
• Gold spot down 0.1% to $1,834.10
• U.S. Dollar Index little changed at 104.26

Top Overnight News

1. Japan’s 10-year government bond yield on Wednesday breached the top end of the Bank of Japan’s policy band for a second straight session, prompting the central bank to step into the market with emergency bond buying and offering of loans. RTRS
2. Two of Japan’s biggest automakers (Toyota & Honda) agreed to the biggest wage hikes in decades in an early sign of momentum in annual pay negotiations as the central bank looks for evidence of a wage-price cycle that could lead to policy change. BBG
3. Chinese authorities have urged state-owned firms to phase out using the four biggest international accounting firms, signaling continued concerns about data security even after Beijing reached a landmark deal to allow US audit inspections on hundreds of Chinese firms listed in New York. BBG
4. Missing Chinese investment banker Bao Fan was preparing to move some of his fortune from China and Hong Kong to Singapore in the months leading up to his disappearance, according to four people with knowledge of his plans. FT
5. Investors increase bets on ECB lifting rates to all-time high. Buoyant service sector and wages fuel expectations of further rises in eurozone borrowing costs. FT
6. The Fed minutes may show how many officials pushed for a larger hike and whether they saw the need to take rates higher than anticipated. Markets expect tightening to be extended after stronger economic data and some hawkish messaging, with rates peaking at 5.36% this year. The RBNZ slowed its pace with a 50-bp increase to 4.75% after mulling another move of 75 bps. The projection for peak rates was left unchanged at 5.5%, over a slightly longer timeframe. BBG
7. Authorities accused crypto trader Avi Eisenberg of manipulating token prices on an exchange. Mr. Eisenberg countered, saying he did only what was permitted by the exchange’s software code. At the core of this case is the idea held by some crypto enthusiasts that “code is king.” WSJ
8. In the hunt for Lael Brainard’s successor, the White House is “focusing in” on Harvard University professor Karen Dynan, Northwestern University finance professor Janice Eberly and Morgan Stanley Chief Global Economist Seth Carpenter. BBG
9. JPMorgan cut staff access to ChatGPT, a person familiar said, confirming an earlier Telegraph report. The move wasn’t triggered by any specific incident. BBG
10. Consistent with the increase in leverage, demonstrated hedge fund equity market exposures have begun to rise from the extremely low levels registered late last year. Hedge funds exhibited exceptionally low betas to the equity market in 2022, reaching levels only matched during the last 20 years in 2009. Betas have rebounded in the last few weeks, driven in part by increased net length, but remain well below historical averages. GIR

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were subdued after the declines on Wall St where the major indices were pressured on return from holiday as strong PMI data from Europe and the US spurred hawkish central bank repricing. ASX 200 briefly dipped below 7,300 amid a slew of earnings releases although clawed back most of its losses after weak data releases including a surprise contraction in Construction Work and softer-than-expected Wage Price Index, which removes some of the hawkish impulses for the RBA. Nikkei 225 underperformed and approached closer to testing the 27,000 level to the downside. Hang Seng and Shanghai Comp. conformed to the subdued mood in which weakness in tech briefly pulled the Hong Kong benchmark into correction territory although losses were then pared after the budget announcement which included a giveaway of HKD 5,000 in consumption vouchers and a cut to salary taxes, while there was also strength in HSBC and Hang Seng Bank post-earnings.

Top Asian News

• Hong Kong Finance Secretary Chan delivered the Budget and confirmed the government will provide HKD 5k in consumption vouchers to residents aged 18 years old and above, while they will reduce salaries tax with a ceiling of HKD 6,000 which will benefit 1.9mln taxpayers and lower government revenue by HKD 8.5bln. Chan also noted that the city is at the beginning of a recovery and that GDP contracted by 3.5% in 2022, although the government expects Hong Kong GDP growth of 3.5%-5.5% in 2023.
• China’s top diplomat Wang Yi met with Russia’s security chief and said the two sides discussed their willingness to oppose all forms of unilateral bullying and discussed ways to improve global governance. Furthermore, the two sides believe peace and stability in the Asia-Pac region should be resolutely upheld and they oppose the introduction of a cold war mentality, according to Reuters.
• RBNZ hiked the OCR by 50bps to 4.75%, as expected, while it maintained its view for rates to peak at 5.50% and considered hikes of 50bps and 75bps at the meeting. RBNZ stated that although there are early signs of price pressure easing, core consumer inflation remains too high and the Committee agreed it must continue to raise the OCR to return inflation to the target and to fulfil its remit.

European bourses are softer across the board, Euro Stoxx 50 -0.8%, as hawkish price action remains in full swing. Sectors are lower across the board ex-Media following individual earning updates, while Basic Resources lag as underlying commodities are dented. Stateside, futures are flat/negative with the ES holding around the 4k mark having briefly and incrementally dipped below the figure in European trade.

Top European News

• ECB’s Villeroy reiterates that there is excessive volatility of the market view on the terminal rate. Already in restrictive territory with a 2.5% rate, ECB is not obliged to hike at every meeting to September, via Les Echos. Remarks which echo his commentary from last Friday.
• UK PM Sunak reportedly secured the backing of two key Brexiteers for the Northern Ireland trade deal with Heaton-Harris and Braverman getting behind the outline agreement, according to FT.
• DUP’s Donaldson reportedly told an ERG meeting on Tuesday that UK PM Sunak was just halfway to meeting the DUP’s seven tests re. N. Ireland Protocol, having made progress towards three or four of them, via Politico citing sources; added that progress towards the remaining DUP tests is critical, telling PM Sunak to abandon the “arbitrary deadline” of April 10th.

FX

• The DXY remains underpinned on haven dynamics and as yields continue to climb across the board, index continues to climb above a 104.00 base with the current high at 104.33
• As such, peers are generally softer across the board with the AUD lagging post-data and as the NZD clings onto gains following the hawkish RBNZ announcement; AUD around 0.6810 and NZD near 0.6210 vs USD.
• EUR was generally unreactive to the morning’s Ifo data while dovish commentary from Villeroy prompted some pressure, but this was brief and limited given his remarks are a repeat of Friday’s, EUR/USD at the lower-end of 1.0630-1.0663 parameters.
• JPY and CHF are rangy and narrowly mixed against the USD, after the JPY regrouped on some convergence in JGB-UST yields irrespective of BoJ buying while CHF shrugged off an upbeat domestic investor survey.
• GBP is giving back some of Tuesday’s marked upside, with caution around N. Ireland Protocol progress perhaps weighing though the focus is firmly on BoE-related dynamics; Cable around 20 pips shy of 1.21 though off worst.
• EUR/SEK continues to test 11.00 with Riksbank’s Thedeen assisting while the ZAR is a touch softer heading into the budget announcement from 12:00BST/07:00ET onwards.
• PBoC set USD/CNY mid-point at 6.8759 vs exp. 6.8776 (prev. 6.8557)
• Yonhap reports that as USD/KRW soared “the foreign exchange authorities called an emergency market situation inspection meeting this afternoon.”.
• Riksbank’s Thedeen says inflation is far too high; January’s inflation data was a negative surprise, it is worrying.

Fixed Income

• EGBs have experienced a modest bounce in the wake of well-received EZ & UK supply, with Bunds now back to 104.00 from the new 133.63 YTD low and Gilts firmly above 101.00 in a similar fashion.
• Prior to this, the complex had been under marked pressure in a continuation of recent hawkish price action with the German 10yr yield as high as 2.57%; though, pre-supply this eased following a rerun of recent dovish remarks from Villeroy.
• Stateside, USTs have been moving in-tandem with EGBs with specific catalysts thin ahead of FOMC minutes and a 5yr sale, as such USTs are flat within 110.30+ to 111.08 parameters.

Commodities

• Crude benchmarks remain underpressure with specific developments limited and focus on the broader risk tone; WTI & Brent Apr at the lower end of USD 74.96-76.55/bbl and USD 81.70-83.25/bbl intraday parameters respectively.
• Nat Gas futures are mixed, though remain pressured vs recent levels as desks continue to cite relatively mild weather in the US and Europe.
• Kazakhstan may send the first batch of oil to Germany in the coming days which could possibly occur today, according to RIA citing the Energy Minister.
• Morgan Stanley sees Brent trading in a USD 90-100bbl range in H2 vs. its prev. view of USD 100-110bbl; raises estimate for oil demand growth to 1.9mln BPD from 1.4mln BPD.
• Nigeria raises March Bonny Crude OSP to +0.95/bbl vs dated Brent; Qua Iboe raise to +1.27/bbl vs dated Brent.
• Spot gold is little changed as any haven allure is offset by the USD’s strength, while base metals are lower given the tone and with focus on commentary from Rio Tinto overnight.
• Ukraine could export a total of 8mln tonnes of agricultural good a month for Odesa and Mykolaiv ports; will talk to UN to extend the grain deal for another year, according to Ukrainian Deputy Minister.

Geopolitics

• Russia reportedly conducted an ICBM test when US President Biden was recently in Ukraine although the test was said to have failed, while an official stated that Russia notified the US in advance of the launch through deconfliction lines, according to CNN.
• Russian PM Medvedev says Russia is ready to defend itself with any weapon, including nuclear.
• Russian Foreign Minister Lavrov says relations between Moscow and Beijing are developing despite the tense international situation; China’s Top Diplomat says we continue to maintain close communication with Russia, via Sky News Arabia. Subsequently, Russian Kremlin says President Putin is to meet with China’s Top Diplomat Wang Yi on Wednesday (as touted).
• US President Biden’s administration is expected to impose fresh sanctions on about 200 Russian individuals and entities this week, according to WSJ citing sources.
• North Korea could fire ICBMs at a normal angle and conduct its seventh nuclear test this year, according to South Korean lawmakers citing intelligence officials.

US Event Calendar

• 07:00: Feb. MBA Mortgage Applications, prior -7.7%
• 14:00: Feb. FOMC Meeting Minutes
• 17:30: Fed’s Williams Discusses Inflation

DB’s Jim Reid concludes the overnight wrap

I’m still in a bit of a state of shock this morning after the Liverpool / Real Madrid game last night. From wild jubilation to the end of the world within an hour. A Bit like financial markets in the last three weeks.

Back before the game when there was still hope in my heart, I released my latest monthly chart book, “Waiting for the lag” that debates the themes around the near-term improvement in the global outlook versus that of the lag of monetary policy. At this stage of a normal hiking cycle, we show that markets and economies are usually fairly benign so don’t confuse recent strength in data as a soft landing. It’s not until year 2 onwards of the hiking cycle that pain normally starts to be felt. So the real test will be when the lag of monetary policy fully kicks in as it should do over the next few quarters. By March, the ECB will have likely hiked +350bps in 8 months and the Fed +475bps in 12 months. More hikes are likely to come too.

Indeed our European economists yesterday lifted our ECB terminal rate call from 3.25% to 3.75% (more below). Until all these hikes on both sides of the Atlantic fully pass through the economy it is impossible to sound the all clear. We’ve always thought the first few months of the year would be positive with the problems building by year-end, but the extent of the rally in January made us shift back to neutral in credit quicker than we thought we would. Indeed, we think US credit has now passed the tights of the year. See the chart book here for much more.

The skinny in markets today is that the week has sprung into action over the last 24 hours after the US holiday on Monday, as a run of better than expected flash global PMIs led to a sizeable global bond sell off (10yr USTs +13.8bps), with the S&P 500 (-2.00%) wiping out its February gains. More on markets later but while we wait for the full lag of policy, the flash PMIs continued to improve yesterday from what were quite stressed levels. Indeed the US composite PMI rose back into expansionary territory at 50.2 (vs 47.5 expected). Much of the strength originated from a strong performance in services, which surprised to the upside at 50.5 (vs 47.3 expected). There was less evidence of a similarly strong improvement in manufacturing as it modestly surprised to the upside at 47.8 (vs 47.2 expected). As we dug into the weeds of the data release, it is clear that whilst input costs rose at a softer pace in February, there was a sharper rise in private sector output charges at both manufacturing and service sector firms. This comes as the pace of increase in selling prices was the quickest it has been since October, as firms reportedly passed through these increases as costs to their customers. This increased the chatter on inflation being sticky. The immaculate disinflation story has had some big blows in the last 2-3 weeks.

Markets subsequently moved to price in bets that the Fed will need to keep rates higher for longer, as expectations for the terminal rate for July’s meeting increased by 6.2bps to 5.367%. However, the increase was most evident for December’s meeting, with rate expectations for year-end increasing by 12.5bps to 5.19% since Friday’s close.

With uncertainty over terminal back on the agenda, the S&P 500 fell back -2.00% in its largest down move since the day after the December FOMC meeting and erasing its February gains. It was a broad based decline for US equities with every industry group lower on the day as over 93% of index members declined. The NASDAQ retreated further, down -2.50% at the close – also its biggest downside move since December 15. In US fixed income markets, the 10yr US Treasury yield spiked up by +13.8bps to reach its highest level since the second week of November at 3.945%. The 2yr Treasury also saw large moves, as yields rose +10.6bps to 4.723%, the highest level since July 2007. All eyes will be on the release of the Fed’s minutes today, as markets look for guidance on policy going forward. However it’s likely to feel a bit dated as a lot has happened in the subsequent three weeks.

Over to the other side of the Atlantic, the European PMI releases fitted in with the global pattern of improving services, but limited improvement from manufacturing. The EA services PMI came in above expectations at 53 (vs 51 expected). On the other hand, we had a downward surprise with the manufacturing release which fell to 48.5 (vs 49.3 expected). Resultingly, the composite PMI rose to 52.3 (vs 50.7 expected) and into expansionary territory. Against this backdrop, markets have moved to price in +126bps of rate hikes until hitting terminal at the October meeting (3.658%), up +6.4bps yesterday.

As stated near the top, our European economists yesterday lifted their ECB terminal rate call from 3.25% to 3.75%. They had previously expected a 50bp hike in March and a final 25bp in May. Now the baseline is for 50bp hikes at both the March and May meetings followed by a final hike of 25bp in June. See their note here for why a robust European economy and labour market along with hawkish ECB commentary have caused them to upgrade their call. They also explain why the heightened uncertainties make risks fairly balanced for a terminal landing zone between 3.50-4.00%.

Narrowing in, the German composite PMI also beat consensus, rising into mildly expansionary territory to 51.1 (vs 50.3 expected). This strong performance largely came from services, which rose to 51.3 (vs 51 expected), whilst manufacturing surprised to the downside at 46.5 (vs 48.1 expected). These releases affirm our expectation that Germany will have a shallow technical recession over the winter half year. For a bit more colour, look at the new Germany: Economic Chartbook from our Frankfurt team for all things Germany related. The beat in German composite PMI also reflects a rosier outlook for the German economy following a warm winter (here), and a significant drop in wholesale gas prices and favourable gas storage levels. Indeed, our German economists confirm the view that they’ll be no gas supply crunch for the country for this winter nor for winter 23/24. See their latest and final European Gas monitor here. Final due to the fact that the supply issue has now been covered. Yesterday, European natural gas futures sat below €50 at €48.54/contract, down -2.67%.

France’s PMI’s largely mirrored the broader Euro Area release, with the manufacturing surprising to the downside at 47.9 (vs 51 expected), and services to the upside at 52.8 (vs 49.8 expected). The overall composite PMI rose into expansionary territory to 51.6 (vs. 49.8 expected). Off the back of these upward surprises and expectations of larger rate hikes by the ECB, the 10yr bund yield rose +6.5bps to 2.529%, reaching their highest level since the end of 2022. The policy sensitive 2yr bund also rose by +5.1bps yesterday. The STOXX 600 modestly fell back -0.19%.

This morning in Asia equity markets are tracking the US falls with the KOSPI (-1.46%) emerging as the biggest underperformer followed by the Nikkei (-1.30%), the CSI (-0.56%) and the Shanghai Composite (-0.25%). Meanwhile, the Hang Seng (+0.03%) is just above flat after opening lower. In overnight trading, US stock futures tied to the S&P 500 (+0.19%) and NASDAQ 100 (+0.28%) are inching higher.

Early morning data showed that Japan’s producer prices index (PPI) rose +1.6% y/y in January, inline with market expectations and slightly higher than December’s increase of +1.5%. Elsewhere, Australia’s wage price index (WPI) for the final three months of 2022 rose +3.3% (+3.5% expected) from an upwardly revised +3.2% in the September quarter, thus slightly easing the RBA’s rate hike concerns.

In terms of monetary policy action, the Reserve Bank of New Zealand (RBNZ) hiked interest rates by +50bps (as expected) to a more than 14-year high of 4.75% while highlighting that rates could still rise as inflation remains too high. Following the decision, the New Zealand dollar rose as high as $0.6246, reflecting the hawkishness of the statement before settling to trade at $0.6224 (+0.03%) as we go to press.

Back to yesterday, and the same PMI story reverberated in the UK as the composite PMI came firmly in above expectations at 53 (vs 49 expected). There was a big jump in services, which rose to 53.3 (vs 49.2 expected). Manufacturing saw a stronger beat than over in the Continent, with UK manufacturing PMI surprising to the upside at 49.2 (vs 47.5 expected). With concerns over inflations still at large, 2yr and 10yr Gilts rose +16.3bps and +14.3bps respectively.

Aside from the rush of the global flash PMIs, we had further developments in the geopolitical space yesterday, as Bloomberg reported that President Putin announced Russia was suspending (but not exiting) its participation in the New Start Treaty, a significant shift in its policy. The Treaty limited each signatory to no more than 1,550 deployed nuclear warheads and 700 deployed long-range missiles and bombers and had been renewed for five years in 2021, as reported by Reuters. We also saw Russia’s Secretary of the Security Council Patrushev meet with China’s Director of Central Commission for Foreign Affairs Wang Yi in Moscow. Yi had previously met on less than amicable terms with US Secretary of the State Blinken last weekend. President Biden reiterated NATO’s resolve at a speech in Warsaw yesterday, saying “there should be no doubt: Our support for Ukraine will not waver, NATO will not be divided, and we will not tire.” This comes alongside the $480mn arms announcement made by the Biden administration in recent days.

Looking to other data releases, yesterday also saw the release of Germany’s February’s ZEW investor expectations index, which rose to 28.1 (vs 23 expected). We also had Canadian February CPI data, which decelerated to 5.9% year-on-year (vs 6.1% expected) – a rare recent positive inflation surprise.

To the day ahead. In terms of data releases, we have the German February ifo survey, and the France February business and manufacturing confidence indicators. For central banks, first and foremost we have the release of the Fed’s FOMC minutes, and we will also hear from the Fed’s Williams. Finally, we will have earnings releases from NVIDIA, TJX, Pioneer and eBay.