Anxiety Levels Rising 

With the FOMC committing to 50bp hikes over the next two meetings, the Board conveys the intention to tighten financial conditions to bring inflation down, but not to shock markets. However, a steeper yield curve amid higher rates vol suggests investors are not convinced that the Fed can snuff out inflation. 

Much of this relates to the behavior of Treasury yields and inflation expectations. Despite the Fed becoming sequentially more hawkish, the market isn't winding down its inflation outlook.

Circumstances have locked The Federal Reserve and the US inflation in a race to see who can be the most hawkish, but the Fed always seems to be in catch up mode.

Questioning the ability of central banks to lean against inflation effectively remains a significant source of angst as investors weigh greater near-term policy certainty versus medium-term inflation uncertainty.

The longer this goes on, it will drive even higher investor anxiety levels and pressure stocks lower.

Tightening financial conditions have outweighed the surprising strength of 1Q earnings reports. Looking forward, the path of the market will depend on the Fed's battle against inflation.

Given the unsettled backdrop of the Ukraine War and China's economic woes, it is challenging for the Fed to aggressively raise interest rates without dropping the US economy into a sinkhole.

And if the heady "Fed behind the curve" mix isn't unsettling enough, risk sentient continues to price in a recession through the global benchmark S&P 500. Hence I suspect the direction of travel for risk is lower as stock market participants try to price in a recession through the S&P 500.

Oil

Oil gained ~1.5% Friday and posted its second straight weekly increase on the prospects of tighter supply.

Oil prices are holding up despite broader market weakness. However, the skew may start to bend lower as it’s tough to look the other way on broader market anxieties suggesting recessionary concerns and all that entails for a possible hard landing could start to catch up with supply concerns. And that could tame oil prices again.

EU policymakers will likely try to execute the upcoming European sanctions against imports of Russian crude oil in a 'tidy' fashion, but the oil market implications are not straightforward.

Last week's proposal included additional Firewall rerouting supply to third countries by prohibiting European companies from providing vessels, insurance, or transit services, but it is impossible to stop all flows. 

General assessments suggest that a 1-2 mmb/d supply diversion to third countries is plausible, easing the impact of the EU embargo. However, what is making things a bit of a crapshoot is that with Russia no longer reporting production data to OPEC+, and the imposition of EU restrictions, fundamental oil data relating to Russia will be increasingly difficult to nail down.

Forex

It's been a bit of a central bank bonanza of late, with the broader market waking up to the fact there may be an extreme impact on assets from tightening policy, with cross-asset risk sentiment finishing the week on a sour note.

Still, there is no rest for the weary with US CPI up on May 11, which will be the primary market focus this week.

Risk sentiment weighs on G10 ex-USD, leading to a flurry of activity. Despite a broadly strong NFP, the sentiment story can be described as "risk-off," but several evolving subplots exist. 

1. Elevated and persistent US rates vol is forcing front-end vol in G10 FX to find a "new normal"—the post-event vol supply barely dents implied levels and feels like near-term risks and realized pain would keep the front end support.
2. Even with the ECB hawks out in a full force press to defend the EUR, directionally, there is new demand for downside EUR/USD and GBP/USD on weakness mainly concentrated in a 2w-6w space to capture current dollar strength at the next central bank meetings, Indeed a vital signpost for USD bulls as traders are rolling down strikes and adding delta to the positions. This week, GBP feels particularly vulnerable, if outright demand for vol for strikes below 1.20 remains in order due to a dovish inference from the BoE. For USD/JPY, it is proving impossible to call the top, and without a meaningful shift in US yields or a real depreciation in global risk sentiment, it is hard to see USD weakness here.
3. China's lockdown/zero-COVID policy continues to weigh on commodity currencies, and despite a hawkish RBA, AUD is failing to lift off, weighed down by external demand factors.