The 3% Speed Bump

US equities ended Tuesday session in the positive as the US 10-year yield stretching above the 3% mark acted like a speed bump. That’s relatively good news for the market, because it clearly shows that, even when the news is not great, the Federal Reserve (Fed) pricing doesn’t get much uglier when the 10-year yield goes above that 3% mark.

Yet, high energy prices and World Bank cutting the global growth forecast from 3.2% to 2.9% weigh on sentiment and could rapidly reverse gains.

Oil rally is here to stay

The barrel of American crude is above the $120 this morning, and the pressure remains comfortably to the upside

The supply side is hard to fix in the short run, as even pumping more oil doesn’t necessarily mean that the refineries have the capacity to process enough oil to ease the supply crisis.

The only thing that could slow the oil rally is a decreased demand. But Goldman says that Brent needs to extend the rally to $135 per barrel over the next year to solve the market deficit.

Due today, the US oil inventories will be closely watched by oil traders. While the oil inventories in the US fell sharply at last week’s data, adding to the positive pressure in oil prices, the API data this week hinted at a surprise 1.8-million-barrel build for this week’s data release. If that’s the case, we could see a short relief on oil prices, but the medium term direction remains bullish, unfortunately.
Unavoidable recession

World Bank cut its 2022 growth forecast for the second time this year, from 4.1% in January to 3.2% in April and to 2.9% this week on the back of several-years-long of above-average-inflation and below average growth, that will especially hit low to middle income economies.

The probability of US recession is also being pulled higher by several big banks. Morgan Stanley, for example, recently said that the probability of recession in the US jumped from 5% to 35% since the start of the year.

USD/JPY off the chart

Despite easing US yields, the US dollar remains relatively strong before Friday’s inflation read, meaning that many investors are preparing to see a bad surprise.

The EURUSD is gently following its 50-DMA toward the downside, but the downside should remain limited before Thursday’s European Central Bank (ECB) meeting, which could be a hawkish turning point for the ECB as the new economic forecasts will likely ring the alarm bell on surging, and sticky inflation.

The dollar-yen, on the other hand, is surging off chart. The pair surpassed the 133 level, on the back of a strong divergence between the hawkish Fed and supportive BoJ policies. But at the current levels, the technical indicators hint at overbought market conditions in USDJPY. A downside correction below the $130 level would be healthy.

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