Many of today’s inflation hawks attribute the current high levels of inflation to excessively loose economic policies — both fiscal and monetary. They point to the policies implemented at the onset of the pandemic when public health considerations precipitative forced shutdowns across many sectors of the economy. At that time, Congress passed a massive covid relief bill that directly defrayed business losses and supported consumer spending; and the Fed sharply ramped up its purchases of financial assets, keeping interest rates near zero and assuring ample liquidity to allow the recovery to gain traction. Would it really have been a better choice to have pursued policies that would have deferred these achievements until some more distant date? I tend to think not. I accept the current level of inflation as somewhat of the price that had to be paid to get America back to work. In any case, if you want to blame policy makers for being responsible for our current inflation, it’s only fair to credit those same people and institutions for precipitating the rapid pace of economic expansion that we’ve enjoyed for the last 6 quarters and counting, culminating with the recovery of virtually all the job losses from the pandemic and the lowest unemployment rate since immediately before the pandemic. Econ 101 teaches that contractionary fiscal and monetary policy can be used to tamp down inflation. In both policy venues, the conventional anti-inflationary remedy requires suppressing aggregate demand. Fiscal policy does so by reducing spending by the government sector and/or raising taxes to decrease discretionary incomes, fostering a lower pace of spending by both households and businesses. Tight monetary policy requires reducing the rate of monetary expansion, which precipitates higher interest rates; and those higher interest rates make borrowing more expensive, causing a cutback in spending activity. Those who blame current inflation rates on previously employed economic policies generally favor using both fiscal and monetary policy levers to address our current inflation difficulties. I’m on board with this orientation in connection with monetary policy, but I’m less enthusiastic about the shift of fiscal policy. I fear that the broad-brush fiscal policy designed to dampen aggregate demand may be unnecessary and even shortsighted. Monetary policy is a blunt tool that inherently chooses between directing its efforts to either (a) encourage faster economic growth and lower unemployment or (b) fight inflation. Fiscal policy, on the other hand, isn’t so binary. While fiscal policy can certainly be used to counter inflation, it must be used in connection with other policy goals, as well, like insuring health, safety, and general welfare. Sometimes — like now — these various objectives may be somewhat in conflict; in which case objectives unrelated to inflation shouldn’t be entirely ignored. It’s also important to realize that while government spending is certainly a component of aggregate demand, over time, that same spending can also influence aggregate supply. Specifically, any spending that improves market efficiencies or encourages greater labor force participation stimulates aggregate supply along with aggregate demand. Categorically seeing such expenditures as inflationary is an overly simplistic assessment. Whether spending is inflationary or not may depend on the nature of the expenditures and the time horizon under consideration. Over time, the supply side effect could very well dominate relative to demand side effects in many types of government spending. The traditional economic policy remedy on the fiscal side fails to give appropriate weight to this consideration. Consider, for example, the various kinds of spending initiatives that had been suggested under the Build Back Better program, including funding to (a) maintain and improve traditional infrastructure, (b) expand broadband access, (c) lower health care costs, (d) encourage the transition to clean energy, and (e) offer support to families with pre-school age children. Categorizing all of these initiatives as inflationary is disingenuous. That’s hardly the case. Much of that spending would have directly lowered costs for American households or stimulated higher labor force participation in a host of newly created jobs. In any case, as originally conceived, all the expenditures under the Build Back Better bill were to be funded by higher taxes. By itself, that tax provision should have obviated the criticism that the bill was inflationary. The fact that the Build Back Better plan has failed shouldn’t preclude further efforts to pass a more scaled back version of it. Current circumstances relating to each of the bill’s component areas mentioned above are certainly not optimal; and failure to embark on any constructive action in any of these areas is indefensible. We can walk and chew gum at the same time. Monetary policy can bear the onus of bringing down inflation. Fiscal policy can be directed toward solving other problems.

A barrage of economic indicators out of Europe and America will put the spotlight on the euro and US dollar next week. The data could further reinforce the diverging paths of monetary policy between the Federal Reserve and European Central Bank. European traders will additionally be keeping a watch on the outcome of the French presidential election, while RBA policy could come under scrutiny too as Australia publishes quarterly CPI numbers. But it is the Bank of Japan that could attract the most attention as it is set to keep policy unchanged even as the yen plunges across FX markets.  

EU flash CPI (Apr) – 29/04 – despite an inflation rate that is already at a record high of 7.4%, the recent ECB meeting saw a slightly more dovish tilt from President Lagarde and the governing council. This came across as a bit of a surprise to a lot of people given the hawkish tilt seen in the March meeting. This stance has already started to shift, even as core prices remain over half of where headline CPI is at 2.9%. We’ve seen a raft of ECB policymakers become more vocal about a rate rise as soon as July, with Belgian ECB council member Pierre Wunsch and ECB vice President Luis de Guindos saying a July move is becoming more likely. These calls are likely to get louder if we are to take clues from the likes of UK and US core CPI, which initially lagged behind the headline rate, and now appear to be accelerating. The ECB appears to be underestimating this effect, although there is slightly more slack in the eurozone labour market, which means wage growth will lag more. Another hot number here, with a move to 7.6% will ramp up the pressure for a July rate hike even further. France election – 24/04 – it’s an important weekend for French politics as incumbent President Emmanuel Macron and Marine le Pen go head-to-head in the second round of the French Presidential election. Macron is still the favourite to prevail when push comes to shove, however for most voters the choice is about as appetising as a mouldy piece of bread, a global trend that appears to have affected politics worldwide. In 2017, Macron prevailed with over 60% of the vote, however on this occasion Le Pen appears to have closed the gap, mainly down to the fact that Macron has shown himself deaf to the concerns of the poorest members of French society. Much will depend on whether the anti-Macron vote coalesces into a shift of support for Le Pen, or whether French voters simply refuse to vote for either. This is likely to be the biggest risk for Macron, that voters don’t turn out and Le Pen squeaks through that way.  Bank of Japan rate decision (Apr) – 28/04 – the decline in the Japanese yen is likely to increase pressure on the Bank of Japan to be slightly more hawkish when it meets later this week. Since the end of last year, the Japanese yen has lost over 10% against the US dollar, which for a country is a net importer of commodities and energy in particular will exert huge upward pressure on inflation. The Bank of Japan has spent years trying to ignite the inflation genie out of its bottle with very little success. In March, headline CPI increased from 0.9% in February to 1.2%, however it is still below the levels of 1.5% seen in February 2018. With an inflation target of 2% the BOJ has only managed to briefly breach and/or hit that target in 2008, and for a few months in 2014 and 2015, when CPI peaked at 3.7% before dropping sharply. We could see a similar pattern play out here if commodity prices continue to surge and the yen continues to plunge. Germany/France/Italy and Spain Q1 GDP – 29/04 – the recent surge in energy prices, and commodity prices more broadly is expected to have a chilling effect on economic output in Q1, and that’s before we factor in the conflict in Ukraine. The German Bundesbank has already indicated that the German economy is set for recession due to the huge surge in energy prices, and if Russian oil and gas gets embargoed that effect is likely to be multiplied. The German economy was already in contraction at the end of last year, with this week’s preliminary Q1 GDP expected to come in at 0.2%, though we could conceivably see a negative number. The French economy is expected to slow from 0.7% in Q4 last year to 0.3%. The Italian economy is expected to slow sharply from 0.6% to 0.1% in Q1, and the Spain economy is expected to slow to 0.5%, down from 2.2% in Q4. US Core PCE (Mar) – 29/04 – recent comments from St. Louis Fed President James Bullard suggest that while it’s  not his base case he might look at considering a 75bps rate hike when the Federal Reserve meets next month. Markets are already pricing in the probability that we’ll see a 50bps move in the Fed funds rate, and appear to be relatively comfortable with that idea now. There has been little, if any indication that headline inflation is slowing given the recent CPI and PPI numbers which we saw in March. Given that the Core deflator is the Fed’s preferred measure of...

Equity markets remain directionless as earnings season ramps up. Bond yields rise again, hitting equity sentiment. Next week is when earnings season really kicks off. Another directionless week for equities as some initial enthusiasm was knocked on the head from firstly Netflix (NFLX) and then rising bond yields. Netflix found plenty of willing sellers but not too many willing subscribers. The stock did a Facebook and plummeted in a huge market cap fall. This marks the second quarter in a row that Netflix has managed such a collapse so investors are now growing increasingly nervous that the same fate awaits Facebook Meta (FB) next week. Tesla (TSLA) did manage to turn things around briefly on Thursday as it unveiled a strong set of results. Deliveries remained strong despite shutdowns in Giga Shanghai but many investors, including your author, were still surprised just how strong earnings were. Demand was never an issue for Tesla but supply so far is not holding it back. Demand in fact is so strong it is leading to inventories falling to just a few days for Tesla.  But taking a step back and looking at the broader picture it was once again the bond vigilantes that did the damage on Thursday. Tesla lost 3% from the open as equities turned lower on some more hawkish commentary from central bankers. Not too surprising you would think but bond markets still pushed the US 10-year close to 3% again and Nasdaq investors took fright and headed for the hills. Everyone appears to be sharing the below chart showing the long-term breakout for the 10-year yield so we may as well add it in but apologies if you are tired of seeing this one already. US 10 Year yield, monthly So back to earnings then, the main driver of stock markets in the short to medium term. Macro factors are the key longer-term determinant as they directly affect earnings but in the short term, earnings will have the key influence. Next week is set to be the big one with big tech up. We have Google, Microsoft, and Facebook. Only Apple and Amazon miss out. Once through those, we will have a clearer outlook on the path for the S&P and other indices for the quarter ahead. So far so good in terms of earnings with 77 companies in the S&P 500 reporting and 77% have beaten earnings estimates.  Sentiment Indicators Again nothing too dramatic here showing the choppy and range-bound market we are in.  Source: AAII.com Source: CNN.com SPY technical analysis Ok I know this is repetition but here too we are range-bound. $415 was the bullish double bottom that set up the contract rally, that, and some stretched positioning (everyone was short basically!). Now positioning is more neutral and the rally has played out. Since then stocks have found it hard to make significant gains as those bond market vigilantes just keep pushing rates higher. $428 is the next support to test and a break of that will bring us to $415 again. Third time may not be a charm. RSI and MFI also remain neutral and rangebound.  Earnings week ahead Source: Benzinga Pro Economic releases US GDP on Thursday and Chicago PMI on Friday are the highlights for the week.  The author is short Tesla

Daniel believes that China has issues besides Covid. Remember Evergrande. He believes Macron will win in France this weekend. He also sees a move by China against Taiwan soon.

Summary United States: Higher Mortgage Rates Begin to Bite The sharp rise in mortgage rates appears to be slowing residential activity. Existing home sales fell 2.7% during March. Housing starts inched up 0.3% during March. However, single-family starts declined 1.7% during the month and single-family permits dropped 4.8%. The NAHB index fell two points to 77 in April. The Leading Economic Index (LEI) expanded 0.3% in March, reflecting slower-but-still positive economic growth. Next week: Durable Goods (Tue), New Home Sales (Tue), GDP (Thu) International: China's Still Stumbling Economic Momentum China's economy started 2022 on a reasonable note as Q1 GDP rose 1.3% quarter-over-quarter, with manufacturing activity holding up quite well and services activity somewhat softer. However, March retail sales fell particularly sharply, while the ongoing impact of COVID lockdowns suggests April activity data could be even weaker. We forecast Chinese GDP growth of 4.9% for full-year 2022, but see the risk around that outlook as tilted to the downside. Next week: Australia CPI (Wed), Sweden Policy Rate (Thu), Eurozone CPI (Fri) Credit Market Insights: Student Loan Developments Are a Boost to Young Adult Balance Sheets On Tuesday, the Department of Education announced another policy designed to bring student loan borrowers closer to debt forgiveness and ease their ability to pay off debts, affecting an estimated 3.6 million borrowers. Topic of the Week: The Beige Book Paints a Clouded Outlook The Fed's Beige Book, released eight times per year, qualitatively reports on regional economic conditions. Although activity was generally solid over the survey period, this week's report underscores a growing sense of uncertainty about the economy's path in the coming months.

EUR/USD struggled to preserve the overnight gains to a two-week high amid resurgent USD demand. The Fed’s hawkish outlook, elevated US bond yields, and the risk-off impulse underpinned the buck. Investors now look forward to the flash Eurozone/US PMI prints for some meaningful trading impetus. The EUR/USD pair witnessed good two-way price moves on Thursday and finally settled near the lower end of its daily trading range. The shared currency drew some support from hawkish comments by some ECB policymakers, which, along with some intraday US dollar selling, lifted the pair to a two-week high. ECB Vice President Luis de Guindos said in an interview that a rate hike is possible in the second half of the year, though the timing will depend on the economic projections. Adding to this, ECB Governing Council member Pierre Wunsch suggested a probable interest rate hike in July and anticipated that rates could be positive as soon as this year. Adding to this, Joachim Nagel, President of the Deutsche Bundesbank, noted that the ECB could raise interest rates at the start of the third quarter. The markets were quick to price in a more than 20 bps rise in July and nearly 80 bps of tightening by year-end. ECB President Christine Lagarde, however, said that the central bank might need to cut its growth outlook further amid concerns about the fallout from Russia's invasion of Ukraine. In contrast, Fed Chair Jerome Powell all but confirmed a 50 bps rate hike at the upcoming policy meeting on May 3-4 and hinted at consecutive increases this year. The divergence in the ECB-Fed policy stance acted as a headwind for the pair. The prospects for a more aggressive policy tightening by the Fed lifted the US Treasury bond yields back closer to the multi-year peak. The risk-off impulse revived demand for the safe-haven USD and led to the pair's sharp decline of over 100 pips. The downfall, however, lacked follow-through, and the pair was seen oscillating in a narrow trading band through the Asian session on Friday. Market participants now seem to await the release of the flash PMI prints from the Eurozone and the US before placing fresh bets. Traders will further take cues from ECB President Christine Lagarde's appearance and the USD price dynamics for some short-term opportunities. Technical outlook From a technical perspective, the pair’s inability to capitalize on this week’s rebound from the vicinity of the YTD low and the overnight downfall favours bearish traders. It will still be prudent to wait for sustained weakness below the 1.0800 mark before positioning for any further depreciating move. The following relevant support is pegged near the post-ECB low, around the 1.0760-1.0755 region, below which the pair is likely to accelerate the downward trajectory towards the 1.0700 round figure. On the flip side, the 1.0890-1.0900 area seems to be an immediate resistance ahead of the previous day’s high, around the 1.0935 zone. Some follow-through buying will suggest that the pair has formed a near-term bottom and pave the way for a move towards reclaiming the 1.1000 psychological mark. The momentum could further extend towards the 1.1025-1.1030 region en-route the next relevant hurdle around the 1.1085 level. 

Outlook: Forget data–today Fed chief Powell speaks and is widely expected to seal the fate of the next hike at 50 bp instead of the standard 25 bp. We have to ask where we stand in the “buy the rumor, sell the fact” cycle. If everyone already expects the 50 bp, and they should, does that feed a softening of the bond selloff (which may have gone overboard)? Bloomberg notes that the Beige Book yesterday uses the word “shortages” more than 50 times for the second report in row. Growth is moderate, prices are still rising and geopolitical developments still create uncertainty and cloud the outlook. Aside from the roiling CAD, the big mover is the dollar/yen, Japan’s FinMin Suzuki is meeting TreasSec Yellen today at G20. Yesterday Suzuki said “We must take appropriate action [on the yen] while closely communicating with financial authorities of the United States and others based on G-7 and other agreements.” Well, no. We can’t see Yellen agreeing to intervention, which is the hidden message when the cause of the yen weakness is at the MoF’s choice–unless we think the MoF and the Bank of Japan are at odds, which makes US or G7 intervention even more unlikely. As we warned yesterday, the correction is an organic thing and should not be considered a function of expectations of an intervention that is improbable in the extreme. Blomberg also summarizes the shift in the eurozone yield situation: “Traders are betting the European Central Bank will raise rates above zero this year for the first time since 2012, after a string of hawkish comments from policymakers. Money markets are pricing 75 basis points of interest-rate hikes by the ECB’s December decision, according to swap contracts linked to the euro short-term rate. The ECB should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, according to Vice President Luis de Guindos.” Most of this is wishful thinking by hawks, although the part about ending assets purchases in July seems moored in reality. A hike at the same meeting is not likely, though. It’s hard to know whether this is Bloomberg bias showing through thin fabric or valuable inside information. We continue to expect the dollar to recover after traders unload a sufficient amount of them, because nothing developing points to a change in the relative differentials. Foreign affairs Russia claims to have captured the city of Mariupol, with thousands trapped inside a steel complex, including resistance fighters. In Germany, the FT Reports panic is spreading over the possible loss of Russian natural gas to embargo. It gets 55% of its supply from Russia. “The fear is that any sudden gas shut-off could paralyse large parts of the country’s industry. Martin Brudermüller, chief executive of the chemicals group BASF, says it would plunge German business into its ‘worst crisis since the second world war.’” Yes, indeed. “Energy veterans are at a loss. ‘I’ve seen many disruptions,’ says Leonhard Birnbaum, chief executive of German energy group Eon. ‘I’ve seen the energy transition from zero to, let’s say, full steam. I’ve seen Fukushima . . . I’ve seen turbulent times. But what we are observing right now is . . . unprecedented.’” The institutes joined together last week to predict an embargo would cause Germany to lose 2.2% of output next year and more than 400,000 jobs. The Kiel Institute says this is a wipeout of 6.5% of GDP. The FT article says the dependence grew out of East German relations with Russia and helped along by the Merkel government phasing out nuclear after Fukushima. “The German politicians seen as having fostered close ties to Russia are now being pilloried. One is Frank-Walter Steinmeier, a former foreign minister in Merkel’s government who is now Germany’s president. He had planned to visit Kyiv last week but was told by Volodymyr Zelensky’s government that he would be unwelcome – a spectacular snub.” The government is scrambling to find alternatives and some critics say Germany industry is exaggerating the potential negative effects, and even if dire outcomes fall on some, “ending Russian energy imports would be ‘manageable’ for the German economy. ‘It is a temporary crisis,’ [a professor] says. ’We can protect jobs with short-time work and support companies with capital injections by the government. We have done this before with Covid. Germany has the fiscal capacity to pay for this.’” We like that last part–Germany can pay for this. Tidbit: The WSJ Daily Shot has this chart on US consumer debt from Deutsche Bank. Debt has fallen mightily and consumers have more cash than debt for the first time in 30 years. What can this mean? First, maybe consumers were able to cut debt because of the emergency Covid payments from the government–and they will go right back to...

It is said that those who do not learn from history are bound to repeat it. Unfortunately, it would seem that this adage is all too applicable to today’s Federal Reserve, who is raising interest rates in a belated response to skyrocketing inflation that a year ago we were told was transitory and nothing to worry about. Had the Fed learned from the painful inflationary experience of the 1970s, it would not have allowed, as it did over the past two years, for the money supply to balloon out of control and interest rates to become as negative as they are today in inflation-adjusted terms. Had the Fed learned from the painful 2008 experience with the bursting of the housing and credit bubble, it would not have allowed even greater bubbles to form in the global equity, housing and credit markets. But instead, it engaged in one of the biggest and most unprecedented money printing programs that the world has ever seen. Fast forward to today, inflation is running at a 41-year high and still accelerating. If inflation continues to surge at the current pace, then we’re only months away from a return to double-digit inflation on the same scale last seen in the 1970s. With just over a week to go until the next highly-anticipated FOMC policy meeting – the Fed now unenviably faces its biggest dilemma ever. Which is to kick the can further down the road and allow inflation to run its course or go big on interest rate hikes at the risk of a recession. If history has taught us anything, then the one thing that we do know for certain is both scenarios, whether that’s persistent Inflation or a recession, ultimately present an extremely bullish backdrop for precious metal prices. Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions:

EUR/USD - 1.0842 Euro's rally above 1.0834/37 resistance to 1.0867 in Europe on broad-based retreat in usd due to fall in U.S. yields suggests recent erratic decline has made a temporary bottom at last Thursday's near 2-year bottom at 1.0758 and stronger retracement towards 1.0890/94 is likely before another fall, below 1.0807 would head back to 1.0783, then 1.0758/62 later. On the upside, only a daily close above 1.0923 would risk stronger gain to 1.0938/45, break, 1.0965/70. Data to be released on Thursday New Zealand CPI. France business climate, EU HICP. U.S. initial jobless claims, continuing jobless claims, Philly Fed manufacturing index and EU consumer confidence.

USDINR: 76.21 ▼ 0.29%. GBPUSD: 1.3063 ▲ 0.52%. EURUSD: 1.0855 ▲ 0.64%. India 10-Year Bond Yield: 7.105 ▼ 0.64%. US 10-Year Bond Yield: 2.874 ▼ 1.39%. Sensex: 17,136.55  ▲ 1.05%. Nifty: 57,037.50 ▲ 1.02%. Key highlights China held key interest rates for corporate and household loans steady, a surprise move that signals Beijing remains cautious about policy easing even as COVID-19 and the Ukraine war weigh on growth. The People’s Bank of China kept the one-year loan prime rate at 3.7% and the five-year rate at 4.6%. The Eurozone suffered a trade deficit for a fourth consecutive month in February as surging energy prices led to a sharp increase in the value of energy imports, data showed. Eurostat said the non-adjusted trade deficit of the 19 countries sharing the euro was 7.6 billion euros compared with a 23.6 billion euro surplus a year earlier in February 2021. The BoJ boosted efforts to defend its yield target, making a fresh offer to buy an unlimited amount of the 10-year bonds for four consecutive sessions. The move comes as the yield on the 10-year JGB remained at 0.25%, the upper limit of its target of around zero percent, throughout Wednesday, despite the central bank's offer to buy an unlimited amount of the 10-year bonds at that rate. USD/INR movement The USDINR pair made a gapped-down opening at 76.3950 levels and traded in the range of 76.17 - 76.5050. The pair closed the day at 76.21. The USDINR pair ended down tracking the pullback in the US dollar from a 2-year high and also due to the inflows into the domestic equity market. As per market participants, inflows related to SBI raising $500 million via syndicated loans too supported the demand for the rupee. However, Brent crude continued to trade at an elevated price that capped further gains for the rupee. Global currency updates The pound edged higher against the US dollar on the pullback in the dollar index and signs of stability in the equity markets. Today due to the absence of any major market-moving economic releases from the UK, the USD price dynamics played a key role in influencing the GBPUSD pair. Euro traded slightly higher against the US dollar due to a pullback in the dollar index. Meanwhile, investors are also focusing on the appearance of the European Central Bank's Christine Lagarde, which is due on Thursday. This will provide guidance to the market participants above the likely monetary policy announcement by the ECB. Along with this, the appearance of Federal Reserve's Jerome Powell will also hold significant importance for the Euro currency. Bond market The 10-year U.S. Treasury yield fell, retreating from levels not seen in more than three years. The yield on the benchmark 10-year Treasury note dipped more than 5 basis points to 2.865%. The yield on the 30-year Treasury bond moved 6 basis points lower to 2.927%. India's 10-year yield slipped today as it closed the day at 7.105%. This could be majorly due to expected inflows in the domestic market seeing lucrative levels. The overall movement across the sovereign bond curve remained within 5 basis points. Equity market Indian equity benchmarks halted a five-day losing streak led by strength in IT, auto, consumer durable and pharma stocks, shrugging off mixed moves across global markets. Broader markets were a mixed bag at the close, as the Nifty midcap 100 rose 0.8% but its smallcap counterpart declined 0.2%. Indian stocks indices ended higher with the Sensex ended 1.02% higher at 57,037.50 while the Nifty rose 1.05% to settle at 17,136.55. Investors awaited more earnings reports from India Inc for cues. Evening sunshine Focus to be on the US Existing Home Sales data due later today. European stocks saw some positive gains after opening around the flat line as investors monitor developments in Ukraine. U.S. index futures were steady, reversing earlier losses, as a rally in Treasuries signaled calming nerves over inflation and Federal Reserve rate-hike bets. Investors are also digesting the latest gloomy global economic forecasts from the IMF and World Bank. The market would closely watch out for US Existing Home Sales data and FOMC members’ speech due later today.

Outlook: US economic data remains feisty but existing home sales today look gimmer. The Bloomberg forecast is a drop of 4.1% after a bigger drop in Feb, a whopping 7%. Trading Economics forecasts 5.9%. The commentary points out a handful of exceptional data points: “Existing-home sales in the US sank 7.% mom to a seasonally adjusted annualized rate of 6.02 million in February of 2022, below market forecasts of 6.1 million. It is the lowest reading in six months. The inventory of unsold existing homes slightly increased to 870,000, equivalent to 1.7 months of supply at the current monthly sales pace. The median sales price rose to $357,300, up 15% YoY. This marks 120 consecutive months of year-over-year price increases, the longest-running streak on record.” Housing is not usually a mover in the FX market but can contribute to the reversal of fortunes in the dollar today. As journalists like to say, not having a clue, “it fell because of” or “it fell despite of” Factor X. The downward correction in the too-strong, overbought dollar is appearing in every major currency and some not so major. The dollar/yen broke its nearly two-week trendlet and is down about 100 points from the high yesterday at 129.405. The inexperienced are sure to say it was the approach to the round number 130 that did the trick, but that’s not, in all likelihood, the case. A Fed study years ago did show that round numbers in FX get hit more than chance would allow, but this time it was a universal correction and little to do directly with the yen. In fact, the BoJ repeated support for curve control today and offered to buy an unlimited amount of 10-year bonds at 0.25%--and will keep the offer open for the next four days. This is affirmation of the policy that is sending the yen lower, not a pushback against it, despite the widening trade deficit. And it’s not intervention, even of the jaw-boning variety, which so far is pretty tame. We expect more fiery rhetoric before the BoJ would actually act. That doesn’t mean the dollar/yen can’t keep falling, depending on whether a bandwagon gets rolling and traders pile on. After all, a 50-year record is notjhing to sneeze at. The B band bottom on the 480-minute chart lies at 124.52. Fibonacci retracement levels are ridiculous but so many traders observe them that we have to accept their view, and there the 50% retracement is 122.08. Or consider the top of the ichimoku cloud at 127.42 on May 2. Bottom line, there is a wide range of possible retracements and any of them might get hit–or none of them, if the yield-divergence crowd prevails and we return to test the 130 level. We get the Beige Book later today, although it’s not likely to deliver any more information about the Fed’s mindset, which is being amply transmitted by individual speakers (and we get three today). Yesterday we had Chicago Fed Evans expecting Fed funds at 2.25-2.50% by year0end. Atlanta Fed Bostic wants expediency and sees the neutral rate at 2-2.5% and sees 1.75% by year-end. Never mind–neither of these two is a voter this time. The market is not giving much attention, either, and delivered a historic moment–Investors in 10-year Treasuries can expect to earn real returns on their money for the first time in more than two years. The yield on 10-year inflation-protected Treasuries rose as high as three basis points in Asia trading Wednesday, with the turnaround driven by the Federal Reserve’s hawkish stance.” Corrections as we are seeing now are terribly tricky. It’s all but impossible to judge between a true breakout and a false one. Technical analysts debate endlessly whether you use different techniques to determine a trend resumption over what you use to determine a new trend. We say they are different–a move contrary to an existing, established trend needs to be seen in perspective of that existing trend. Technical analysis God Perry Kaufman says no, a trend is a trend if the same criteria are used to identify and we are not mathematically capable of differentiating between them. We see the problem is commentators making up stories to justify a reversal and then all too many traders buying into it, delivering that wicked thing, momentum. When a trend resumes later, as it will this time on the yield divergence, we forget all those justifications for the trend to have stopped and reversed. In other words, it’s the human tendency to love and believe stories at fault. But hanging on to basic principles and debunking stories can lose you your shirt. Retreat is the brave stance. Tidbit: The IMF’s WEO economic forecast say, according to Reuters, global growth will fade to 3.6% in 2022, down from 4.4% projected last...