A no-pushback delivery from Federal Reserve Chairman Powell at the WSJ jobs summit seems to be giving fixed income and stocks a bit of a fright, sending investors reeling who were likely looking for a little more hand-holding from the Feds.
On rate hikes, he said the Fed would need to see maximum employment and inflation at and heading above 2% before considering raising rates. Indeed, this seems to be a much weaker commitment to an inflation overshoot than we might have seen previously; it rather implies that 2% and heading to 2.2% might be enough to see them hike rates. The market was not ready for that, and fixed income markets didn't seem to like that line one bit. Powell is doing the bare minimum here while simultaneously hinting at a lift-off level that could be a lot nearer on the horizon than only suspected only a few weeks ago.
But with growth and inflation dynamics as they are, one doesn't need to be a bond market vigilante to think there will be further tests of the current central bank thesis to come before 2022.
If it felt we were in the eye of the storm earlier this week, we’re waist-deep in the policy repricing soup now. Investors are worried about the perpetual stimulus machines of easy monetary policy and fiscal support throttling down. Indeed, the ongoing rate curve repricing and risk asset reaction perfectly illustrates just how hostage investors have worryingly become reliant on easy money policies.
In a rebalancing trend that started last month, high flying tech shares are the first to buckle as torrential policy downpours hit the ground from the foreboding gathering of rate hike fevered thunderheads roiling above. Investor strategy here is to get out of the soup and as far away from high valuation flyers as they possibly can.
The bond selloff extended further after Powell's comments overnight, with US10Y yields up a further 6bps to 1.54% – the highest since 19 Feb 2020. That saw US equities fall again, S&P down 1.6% heading into the close. Oil prices rose almost 4% after Saudi Arabia and most OPEC+ members agreed to keep production unchanged.
Federal Reserve Chair Powell does just the bare minimum in terms of pushback on markets. He says he would be concerned if there were disorderly moves or persistent undue tightening of financial conditions – and bang: 10y yields are back above 1.50%. While justifying the bond market reaction, Chair Powell effectively says that current yield levels are okay as long as moves are not disorderly.
Saudi Arabia seems to have used its 1mb/d voluntary cut as a bargaining chip to persuade most of OPEC+ not to raise production and also appears to have reiterated the desire to see compensation cuts from OPEC+ participants who have produced above quota so far.
OPEC+ concludes with another exemption for Russia and Kazakhstan (allowed to raise output by 130kb/d and 20kb/d, respectively) while, as reported earlier, oil soared as the rest of OPEC+ holds steady at current production levels. Saudi Arabia's output will start to phase back in from May, and it seems likely increases will be permitted across the whole of OPEC+.
Driven by a need to benefit from higher oil prices, Russia desires to raise production amid concerns about sending the wrong signal to US shale producers. At the same time, Saudi Arabia says shale is "not on the radar" as a risk. The next meeting is in April, where we get to do the volatility tango all over again.
Metals Extend Selloff
The selloff in metals continued today, with nickel the worst hit of all after $1,500 drops two days in a row. A resolution to Nornickel's flooding issues, Tesla's actions to limit its nickel dependency and increased supply by Tsingshan Holding Group of 100Kt of battery-grade nickel contributed to pushing the metal to limit down on the Shanghai exchange. Nickel touched a high of $18,890 on the first trading day of the month; today, it traded down to $15,850 (down 14% this week). Copper sold in a $477 range today, down almost 5% at one point despite remaining in deficit. Copper then retraced to settle at $8907.5.
With the selloff in UST breaching the 1.50 "speed limits", FX currencies are experiencing a re-run of the negative impact of higher US real yields.
With Chair Powell all but signalling an achievable lift-off level for 2022/23, USDJPY has extended its 2021 uptrend on the back of equity market weakness and yield divergence.
The EURUSD is lower in a reaction function to higher US yields. The global reflation story does not feed through to EU rates; it feeds through fixed-income markets run by more permissive central banks like the Fed.
In Asia, the underperformance of IDR should not come as a surprise as a high yielder, while KRW and tech-heavy KOSPI weakness is very much consistent with US big tech downside.
Gold continues to struggle in a trend that starting right out of the gates in 2021. And by failing to hit $1,700 this week, the selloff may continue. Rising bond yields and a stronger US have been the most significant obstacle while overall economic conditions improve as the trifecta of Covid vaccines roll out in the US.
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In this edition of “Charts of the Week”, we will have a look at precious metals where the short-term outlook has turned brighter, as well as Bitcoin which is going through a major sell-off right now, followed by Oil – which is finally on the move after days of consolidation – and two major currency pairs.