In Spite of it All

Last week saw a significant reduction in STIR term structure as anticipated Fed hikes evaporated. The refunding was placed with little redistribution. 5 year and 10 year futures continue to trade well this morning as global equities are soft. Implicit in the Fed rhetoric is a fragile growth forecast and significant food/energy price headwind.

We would point out that the Fed's "core" CPI focus is somewhat disingenuous. When headline inflation broke down (and core was flat) in last year's pullback, the Fed opted to stabilize, then grow, the balance sheet quickly. The mantra now that headline is running hot has returned to a "core" metric.

The Fed does seem to be hoping high prices will fix high prices. China does not have that luxury. The BOC moved reserve ratios by 50bp for April 21. The requirement will be a record 20.5% for China's biggest firms. Leaders expressed their interest in negotiations to raise the Renminbi in basket weightings. We continue to monitor these changes as any move to raise the exchange rate will be coupled with SDR chatter.

Finally, here's something we did not know. The CME Group has a suite of contracts to trade oil in Euros. When Iran moved in this direction several years ago it was headline news. The Petro-dollar story has not emerged in this cycle. The contracts are young and thin but should be watched. The foundations of the post dollar world are being placed.

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