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US equities were little changed Monday, S&P up 0.1% heading into the close, reversing earlier gains later in the session as US10yr yields backed up 3bps to 3.98%.

It’s a tough week for stocks to rip higher as, in the back of their minds, investors are still worried about economic reacceleration risk and the Fed implications. After all, the Fed's job is no longer to smooth S&P returns; we have been transitioning from do-no-harm mode to you kinda-have-to-do-some-harm mode if data stays hot.

Still, discussions around owning long-duration stocks are re-entering the debate, which has shifted from being one-sided in 2022 as the Fed hiked rates to tame inflation to a bit more even-keeled as inflation has started to recede, and the end of the Fed's hiking cycle appears near, or at least nearer than a year ago.

Given that the lags inherent in monetary policy create risks of policy error in both directions, markets, like the Fed, have turned 100% data dependent. 

Indeed expect the Fed to let data dependence carve out the path ahead. And since the market has priced in a high bar for incoming data to justify the current rates market pricing, the balance for risk probably leans towards a slightly weaker US dollar which is synonymous with a modestly better risk environment. You get the dollar turn call right, and generally, everything else falls into place.

China reopening trades have severely underperformed, with Asian equities being some of the worst-performing indices this year. It is unclear if this merely reflects a positioning unwind or a market downgrade of China's reopening prospects.

And sentiment has certainly fallen flat with the NPC laying a GDP egg. However, China matters for the dollar as the Greenback is more likely to weaken in a positive global growth environment.

FOREX

February saw a remarkable shift in risk sentiment – from an almost Goldilock-ish mix of peak rates/inflation, China reopening, a shallow recession, lower vol, and easing geopolitical/ energy concerns – to one that resembles more a 'mini tantrum.'’ 

Global developments suggest a more tactical environment for FX. With better growth and higher inflation seemingly contagious, the Fed is not alone in its potential to deliver a hawkish surprise over the next few weeks.

However, Central Banks will likely stick to prior guidance this week. The BoC has already signaled a pause and seems unlikely to deviate from this message this week, while we expect the BoJ to stick to its status quo at this meeting and for the RBA to hike in line with expectations without altering its forward guidance. Nevertheless, the global reach for sufficiently restrictive policy remains intact, suggesting a choppy FX environment ahead, with policy leading much of the way. 

BANK OF JAPAN 

The BOJ will hold its last Monetary Policy Meeting under Governor Kuroda on Thursday/Friday. At the same time, most expect the BOJ to stay on hold, as the meeting will occur just before the FY end and the initial results of the shunto wage negotiations. That said, despite the widening of the YCC band in December, the bond market functioning has continued to deteriorate. Therefore, it is possible that Governor Kuroda could amend YCC this week to lessen the burden on his successor.

OIL 

Oil is higher ahead of several data releases out of China this week that will likely put an end to growing skepticism over the strength of its post-reopening recovery. 

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