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It’s not looking good in the bond market right now.

There is an interesting contrast unfolding with UMich inflation expectations surging but market-based inflation expectations falling. The UMich ones are volatile but I fear that the market is thinking more about tumbling growth beyond the tariff shock and an administration that’s lost its focus on growth (or doesn’t understand the laws of economics).

US 10-year yields are now up 18 basis points on the day to 4.57%, well above where Trump got “yippy” and removed reciprocal tariffs. The market is evidently concluding that’s not enough, or that recent fiscal indications from the US are poor.

This article was written by Adam Button at www.forexlive.com.

• It no longer makes economic sense if US imposes more tariffs
• US should bear the responsibility for the damage caused by tariffs

You don’t need more tariffs to tell you that it already doesn’t make economic sense at this point. At this point, the tariff levels are just a number. The symbolism is more important and the latest retaliation here says that China isn’t going to blink first in this game of chicken. The ball now goes back over to Trump and/or the Fed.

This article was written by Justin Low at www.forexlive.com.

• Prior was 57.9
• Current conditions vs 61.5 expected
• Expectations vs 50.8 expected
• 1-year inflation % vs 4.9% prior
• 5-year inflation % vs 3.9% prior

This article was written by Adam Button at www.forexlive.com.

The UMich consumer sentiment reports is like quantum physics: Something that exists in two states a once. It both matters and doesn’t matter. It’s a deeply flawed indicator but it also captures something, or at least the momentum of something.

This edition is too early to capture the full effects of ‘Liberation Day’ but it will show which way the wind is blowing. Keep an eye on inflation expectations numbers, which were at 4.9% and 3.9%, respectively in the final March data.

This article was written by Adam Button at www.forexlive.com.

So we’re all being held hostage by two men who are too proud to pick up the phone…

CNN reports:

• In private discussions hours before China announced new retaliatory tariffs, the Trump administration warned Chinese officials against such a move
• The Chinese were also told – once again – that Chinese President Xi Jinping should request a call with US President Donald Trump
• Two senior White House officials tell CNN that the US will not reach out to China first
• Beijing has repeatedly refused to arrange a leader-level phone call
• The Trump administration has balked at China’s Foreign Minister Wang Yi serving as the interlocutor

Xi also went on to make a statement that China wasn’t afraid of suppression.

This article was written by Adam Button at www.forexlive.com.

What do you do with Treasuries the next time there is a crisis?

One of the great privileges that the US enjoys in being at the center of the financial system is that when there is a crisis, markets rush into long-dated Treasuries, driving borrowing costs lower. This is a natural hedge to bad news and was most-clearly seen at the start of the financial crisis when, despite the implosion in US banks and home prices, Treasury yields dropped.

In any other country, it would have been the opposite, compounding the crisis.

That hasn’t happened this time and it didn’t happen at the start of covid, forcing the Fed to buy trillions of bonds in unlimited QE.

The cause of that change isn’t a loss of confidence in US solvency — at least not yet — it’s the derivatives market. Highly-leveraged basis trades and swap trades are leading to a new dynamic: bond selling due to deleveraging. Everyone who rushed into bonds at the start of covid or the tariff war has gotten blown up.

Covid was forgivable as a one-off but now it’s a pattern. That’s a huge problem for US policymakers because the next time there is a crisis, you would be foolish to rush into Treasuries. If anything, I would now argue that it’s the opposite, which will remove further liquidity and exacerbate a blowup in yields.

Now there was already a movement for a bailout fund for the basis trade but the make-up of it was clunky and I think that the window of opportunity is now broken, because the reaction function has now changed and the cost of it will be an order of magnitude higher.

Something will have to be done or the Fed is going to be forced into premature QE again next time (or sooner).

This article was written by Adam Button at www.forexlive.com.

• We came into first quarter with solid economic conditions.
• Markets continue to function well.
• Tariffs will push up inflation pressures.
• Tariffs announcements are very significant.
• China trade issues are very big for economy.
• Hard to invest in times of big uncertainty.
• Current slate of tariffs are very high.
• Modal view is for slower growth, not a downturn.
• Financial market movements bear focusing on.
• Won’t rule out a downturn.
• Hard to say when tariffs will impact inflation.
• Would expect inflation “well over” 3% this year due to tariffs.
• Sees mixed bag on longer run inflation expectations.
• At this point, expectation is that Fed will need to hold steady for longer.

The hard data from the US has been great. Strong employment, inflation rate continuing its downward move and business optimism high. If it wasn’t for the trade war, the Fed would have been already cutting rates and we would have had risk assets exploding higher.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• Prior was +3.2%
• PPI -0.4% m/m vs +0.2% expected
• Ex food and energy +3.3% y/y vs +3.6% expected
• Ex food and energy -0.1% m/m vs +0.3% expected
• Ex food, energy and trade +3.4% vs +3.5% prior
• Ex food, energy and trade +0.1% vs +0.4% prior

This is some welcome cooling that shows some disinflation is in the pipeline and there will be more with the recent drops in oil and commodity prices.

• Energy prices dropped 4.0%
• Food prices decreased 2.1%
• Gasoline prices fell 11.1%, accounting for two-thirds of the goods decline

This article was written by Adam Button at www.forexlive.com.

Headlines:

• China announces increase of additional tariffs on US goods to 125%
• China says it will ignore the US on further tariffs escalation
• All eyes stay on the bond market in final trading day of the week
• Some warning signs for US Dollar shorts
• Japan economy minister says to hold negotiations with US on tariffs on 17 April
• ECB’s Lagarde: ECB is ready to use instruments it has if needed
• More from ECB’s Lagarde: Joint fiscal capacity is an appropriate response to shocks
• ECB’s Villeroy: Trump’s economic and financial agenda is wrong path
• Germany March final CPI +2.2% vs +2.2% y/y prelim
• Spain March final CPI +2.3% vs +2.3% y/y prelim
• UK February monthly GDP +0.5% vs +0.1% m/m expected

Markets:

• EUR leads, USD lags on the day
• European equities lower; S&P 500 futures up 0.4%
• US 10-year yields up 4.3 bps to 4.432%
• Gold up 1.4% to $3,218.58
• WTI crude down 0.2% to $59.92
• Bitcoin up 2.8% to $82,148

And so the game of chicken continues. China has chosen not to blink first as they prop up their markets before announcing retaliatory tariffs against the US once more. This time around though, they’re saying with tariffs of over 100% that they aren’t going to escalate it any further with trade conditions effectively stifled at this stage.

It looks like China is going to be hunkering down from here to see how all of this is going to play out. They still have other means to retaliate though, such as devaluing the yuan or restricting exports of rare earth minerals if they do choose. But we’ll see at this stage.

The market took the news in stride for the most part though. The dollar did slide further with EUR/USD touching a high of 1.1475 before backing off again to 1.1350 now. That said, the dollar was already punished hard coming into European trading and it’s still highly vulnerable amid the ongoing tariffs saga.

USD/JPY also fell to near 142.00 before picking back up to 142.85 currently, down 1.1% on the day. For once perhaps, the Swiss franc isn’t the lead gainer and could that owe to the SNB intervening just as EUR/CHF moved close towards the 0.9200 mark? The pair is seen up 0.3% today to 0.9250 now despite risk sentiment staying more cautious.

Elsewhere, GBP/USD is also seen up 1% to 1.3096 and AUD/USD just mildly higher by 0.2% to 0.6235. The aussie continues to be caught in the crossfire of the US-China trade war of course.

In other markets, US futures were down around 1.5% in early European trading before staging a comeback to sit 1% higher. The China headlines saw gains pared but we’re seeing traders fade that with some hope of a deal before the weekend it would seem.

That sentiment is also seen in the bond market with 30-year yields having raced higher to 4.91% before falling back to around 4.81% during the session. Yields are now at 4.87%, still in dangerous territory as we head into US trading.

What a week it has been and we’re not quite done yet. You can’t help but feel that there might be one final twist to the whole saga before the weekend comes along. For now, the ball is pushed back over to Trump’s side of the court. What’s his next play going to be? Or will the Fed be forced into QE if the bond market pain becomes too much to handle?

This article was written by Justin Low at www.forexlive.com.

• Our job is to make sure inflation expectations don’t rise.
• It’s a complicated thing to analyse.
• It’s hard to get a read of what’s happening underneath.
• We must ensure long-term inflation expectations don’t rise.
• I am not seeing evidence yet that long-run inflation expectations are rising.
• Investors may believe that if the trade deficit is going to come down, the US may not be as attractive an investment.
• There may be credibility to the story of investor preference shifting.
• I think we are quite a ways away from the market conditions we saw in the pandemic.
• We cannot determine where yields ultimately settle, we can only smooth the transition.
• There was a lot of good news under the hood in CPI.
• The effect of tariffs suggest inflation will be going back up again, our job is to ensure it doesn’t turn to long-term inflation.
• If we hadn’t had four years of high inflation, I’d be more comfortable taking a look-through approach.
• But with inflation still elevated, it makes me nervous about taking that one time look-through approach on tariffs effect on inflation.
• As I understand it, private credit funds are less leveraged than banks.
• Right now not seeing a systemic risk in private credit.
• It bears watching but not seeing fundamental kindling there.

There’s clearly a lot of focus on inflation expectations at the Fed. That is constraining their reaction to potential growth slowdown. That’s also why the risk of the Fed being behind the curve is very high.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Bloomberg Q: What’s your reaction this morning to China’s retaliatory tariffs overnight?

Wright: “Oh, I think you can see we’re right in the midst of a negotiation. This is home territory for president Trump. Both in his business career and his first term as president, he reads the market place, he engages with people, he uses leverage and we’re going to get to a great result. We’re in the midst of it right now but I’m quite optimistic about where we’re going.”

Just be wary that the wires are cutting all of that short to “the start of a negotiation”. But it’s important to get a full context in times like these, when words like “negotiation” can have the potential to move markets.

From his tone, I would say he seems to be suggesting that they are sort of dancing right now; not exactly sitting down at the table to be talking yet. But you can analyse his comments as much as you want on Bloomberg TV here to get a sense of things.

That is not to say that a deal isn’t coming though. China didn’t blink today and so the game of chicken continues. As the bond market pain continues, will Trump or the Fed blink before the weekend?

This article was written by Justin Low at www.forexlive.com.

• China tariff hike is start of negotiation.
• I am optimistic on where the US is heading with tariffs and China.

He’s been speaking about Iran and global oil demand, but these two lines caught my attention. Is this the first sign that we are about to get some de-escalation?

This article was written by Giuseppe Dellamotta at www.forexlive.com.