The story from Janet and Jay
Continues to point to a day
In two years, nay three
That both can foresee
A rate hike could be on the way
Until then, while growth should expand
No policy changes are planned
If prices should rise
Though, we’ll recognize
There’s simply no line in the sand
With a dearth of new news overnight, the market appears to be consolidating at current levels awaiting the next big thing. With that in mind, market participants continue to parse the words of the numerous central bank and financial officials who have been speaking lately. Atop this list sits the second day of testimony by Fed Chair Powell and Treasury Secretary Yellen, who yesterday were in front of the Senate Banking Committee. While several senators tried to get a clearer picture of potential future activities from both Powell and Yellen, they have become quite practiced at not saying anything of note in these settings.
Perhaps the most interesting thing to be learned was, when Yellen was being questioned about her change of heart on the growth of the Federal debt load (in 2017 she publicly worried over a debt/GDP ratio of 75% vs. today’s level of 127%), she repeated her new belief that the Federal government has room to borrow trillions of more dollars to fund their wish list. “My views on the amount of fiscal space that the United States [has], I would say, have changed somewhat since 2017. Interest payments on that debt relative to GDP have not gone up at all, and so I think that’s a more meaningful metric of the burden of the debt on society and on the federal finances.” She explained. It is remarkable what a change of venue will do to one’s opinions. Now that she is Treasury Secretary, and wants to spend more money, it appears much easier for her to justify the new borrowing required.
At the same time, Chair Powell explained that the rise in bond yields was of no concern and that it represented a vote of confidence in the growth of the economy. We heard this, too, from Atlanta Fed President Bostic yesterday, and this is clearly the new mantra. So, while 10-year yields have backed off their recent highs by a few basis points, be prepared for further movement higher as positive data gets released. The bond market has a history of testing the Fed in times like this, and remember, history also shows that when the 2yr-10-yr spread starts to steepen, it doesn’t stop until it reaches 250-275 basis points, which is more than one full percent higher than its current level. I expect to see that test sometime this summer, as inflation rises. Beware the impact on risk assets in that scenario.
But other than that, and of course the fact that the Ever Given remains wedged side-to-side in the Suez Canal, there is very little happening in markets today. (Apparently, the economic cost to the global economy of this incident is $400 million per HOUR! And consider what it is doing to the concept of just-in-time delivery for supply chains. We have not yet felt the full impact of this event.)
A quick tour of markets shows that Asian equity markets were mixed, with the Nikkei (+1.1%), by far the best performer, while the Hang Seng (0.0%) and Shanghai (-0.1%) essentially tread water. European markets are mostly red, but the movement has been minimal. The DAX (-0.2%), CAC (-0.2%) and FTSE 100 (-0.3%) are perfectly representative of pretty much the entire European equity space. Meanwhile, US futures are edging higher (NASDAQ +0.4%, SPX +0.25%, DOW +0.2%) after yesterday’s late day sell-off. Anecdotally, one of the things I have noticed lately is that the US equity markets tend to close nearer their trading lows than highs, which is a far cry from their behavior up through January, where late day price action almost always pushed prices higher. The other thing that is changing is that the huge retail push into single stock options has been fading lately. Perhaps it’s not as easy to make money in the stock market as it was claimed several weeks ago.
As to the bond market, we continue to see modest strength in the European sovereign market, where the ECB’s impact is clear to all. This morning, in contrast to Treasury yields edging slightly higher (+0.5bps), we are looking at yield declines of between 1.3bps (OATs) and 2.5bps (Gilts) with Bunds in between. There is no question that the ECB’s purchase numbers this week will be close to last week’s rather than near their longer-term average. As an aside, we heard from BOE chief economist Haldane this morning and he explained that the UK economy could be set for a “rip roaring” move higher in Q2 given the amount of savings available to spend as long as the vaccine roll-out continues apace.
On the commodity front, despite the ongoing disruption in the Suez, oil prices have slipped back by 1.3%, although continue to hold above the psychologically important $60/bbl level. As to metals prices, they have drifted down as well, along with most agricultural products. Again, the movements here are not substantial and are indicative of modest position adjustments rather than a new trend of any sort.
Lastly, turning to the dollar, it too has had a mixed session, with both gains and losses across the spectrum. In the G10, AUD (+0.4%) is the leader, followed by the GBP (+0.3%) and then lesser gains amongst most of the rest. Meanwhile, JPY (-0.35%) has been the laggard in the group. Aussie was the beneficiary of short covering as well as exporter interest taking advantage of its recent declines, while the pound seems to have been responding to the Haldane comments of potential strong growth. As to the yen, while there are some concerns the BOJ may cut back on its JGB purchases, it appears the yen was a victim of some importer selling ahead of the Fiscal year end next week.
EMG currencies are also mixed, with gainers led by RUB (+1.0%), ZAR (+0.7%) and MXN (+0.45%) while the laggards have a distinctly Asian flavor (THB -0.35%, MYR -0.35%, TWD -0.3%). The ruble appears to be benefitting from a trading bounce after a 3-day losing streak, while the rand is gaining ahead of a central bank meeting today, although expectations are for no policy change given the still low inflation readings in the country. On the downside, the Bank of Thailand left policy on hold, as expected, but forecast a narrowing of the current account surplus, thus weakening the baht. Meanwhile, both the ringgit and the Taiwan dollar are suffering from concerns over continued USD strength in combination with some technical moves. Overall, the bloc remains beholden to the dollar, so should the buck start to gain vs. the G10, look for these currencies to suffer more acutely.
As it is Thursday, we start the day with Initial Claims (exp 730K) and Continuing Claims (4.0M), but also see a Q4 GDP revision (4.1%, unchanged) along with some of the ancillary GDP readings that tend to be ignored. In addition, we hear from five more Fed speakers, but it is hard to believe that any of them is going to have something truly new to tell us. We already know they are not going to raise rates until 2023 at the earliest and that they are comfortable with higher inflation and higher bond yields. What else is there?
With all this in mind, I keep coming back to the Treasury market as the single key driver of markets overall. If yields resume their rising trend, look for the dollar to rally and equities to fade. If yields edge back lower, there is room for modest dollar weakness.
Good luck and stay safe