Global fragmentation risks higher prices: Lagarde
April 19, 2023
–We’re now two weeks from the FOMC, and the Beige Book is released today. Also on tap is the $12b 20y auction; late wi was 3.90/3.895.
–Not much change in rates, but the curve became slightly more inverted. For example red to green pack in SOFR (2nd to 3rd year) settled -31.5, a new 20 session low. However, on March 8. the red/green pack spread (using H4 as the first red) settled at a historic inversion of -91.5. It nearly went positive after SVB.
Just looking at JUNE prices on the SOFR curve as of yesterday’s settle:
SFRM3 9491.5 or 5.085
SFRM4 9631.0 or 4.690 (yield is 39.5 lower than June’23)
SFRM5 9693.5 or 3.065 (yield is 62.5 lower than June’24)
SFRM6 9698.0 or 3.020 (yield is 4.5 lower than June’25)
The difference between June’23 and June’25 is over 200 bps (of expected easing).
–Big speech by Christine Lagarde on Monday, talking about global fragmentation and supply shocks, and currencies. Worth a read:
https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230417~9f8d34fbd6.en.html
We are witnessing a fragmentation of the global economy into competing blocs…
But that period of relative stability may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships. Instead of more elastic global supply, we could face the risk of repeated supply shocks.
Today the United States is completely dependent on imports for at least 14 critical minerals. And Europe depends on China for 98% of its rare earth supply.
I think her subliminal message is: BUY GOLD!
