(Reuters.) – The biggest question in the first quarter is how high inflation will eventually peak.

Federal Reserve Minutes and the minutes of a Reserve Bank of Australia meeting provide insight into rate-setting thinking. The resilience of stocks and Russia’s rouble may be tested.

This is your market week from Kevin Buckland, Tokyo; Ira Iosebashvili, New York; Tommy Wilkes, Marc Jones, and Dhara Ranasinghe, London.

1 Fed Up

U.S. recession dangers are increasing, according to the brief inversion of a part of Treasury yield curve closely monitored.

Although an inverted curve can predict recessions well, investors are still struggling to understand recent bond moves. After the glowing economic outlook assessment by the Federal Reserve on March 16, stocks have taken the bond saleoff well.

The minutes from Wednesday’s Fed meeting will be available to show the views of policymakers. To curb inflation at its four-decade-highs, the Fed has already suggested larger rate hikes. Details on the Fed’s potential pace of reducing its balance sheet to $9 trillion, which some fear is a danger that markets underestimate, are also crucial.

Graphic: US Fed balance sheet and bond yields – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrqkwavm/Pasted%20image%201648685657247.png

2. WHEN DOVES BUY

Bank of Japan proved its status as the largest central bank and mostdovish in the world, by placing its money where it is. This is an important defense of the Bank’s yield curve control policies.

    The effect of that binge is debatable: yields have only eased slightly from six-year highs, and that arguably had as much to do with U.S. Treasury yields declining from multi-year peaks.

    And there’s a collateral casualty of the BOJ’s uber-easing: the yen, which has plumbed depths not seen since 2015. Although the BOJ believes that a weaker currency is a positive thing for the economy in general, jawboning from a line of government officials seems to suggest a different view.

Australia’s central banking meets on Tuesday. Although a policy shift is unlikely, it may take the bank further to prepare for a rate increase. The markets expect it to happen in June.

Graphic: Japan’s 10-year bond yield, and the yen – https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgqjllpb/japantheme.PNG

3/ BOUNCEBACK-ABILITY

Wall Street and MSCI’s major world stock indexes were down 14% and MSCI’s was down 20%, respectively. Officially the Nasdaq had entered “bear market” territory of minus 20%.

Now? Though the war in Ukraine rages on and interest rates are on the up, the S&P 500 is back to within 5% of its all-time high, MSCI World has recovered half of its drop and the Nasdaq is down a more manageable 8%.

Analysts are hopeful that, once all the dust has settled, corporate earnings and the fearsome “stagflation” scenario will no longer be a problem. TINA or There Is No Alternative is still around and it appears to be well.

Although the next earnings season approaches, it could get more difficult for stocks to resist gravity if there is a Russia-Ukraine crises.

Graphic: World stocks shaken, but just for a while – https://fingfx.thomsonreuters.com/gfx/mkt/zdpxojqawvx/Pasted%20image%201648644317527.png

4/ REBOUND TO REALITY?

The remarkable recovery of the ruble from record-breaking levels in the wake of Russia’s February 24th invasion, Ukraine has been impressive. The rouble has almost returned to its pre-invasion levels in both offshore and onshore markets where Western institutions traded with unsanctioned Russian entities.

This is due in part to capital controls which suppressed the selling of roubles and artificially increased their value. As Russia suffers from falling imports and rising energy prices, there has been a real improvement in Russia’s balance of payment.

The next step in determining whether the demand for currency can be real or artificial is President Vladimir Putin’s request for rouble payment for gas.

Graphic: Russian rouble vs U.S. dollar- https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnmwjavq/rouble%20vs%20dollar.PNG

5/ END AN ERA

While the U.S. yield-curve was inverted, there was a seismic shift in the euro zone bond market with German, French and Dutch second-year debt yields exceeding 0%, for the first times since 2014.

On expectations that the ECB will push its minus 0.5% repo rate up to 0% soon, yields in the bloc saw their largest monthly jump for a decade.

It would also be an important moment for global negative-yielding loans, which have exploded to above $18 trillion globally in 2020. All should benefit: Savers, banks, and pension funds all need to be happy; emerging markets with high-risk corporate debt or those that have benefited from the investors’ “hunt” for yield may not win.

It is difficult to predict a trend in volatile times. If yields rise above 0%, it could be a sign that they are durable.

Graphic: Negative yields on their way out?- https://fingfx.thomsonreuters.com/gfx/mkt/klvykjmnevg/HEATMAP3103.PNG