The first week of March has given investors more reasons to expect faster inflation. From another OPEC+ surprise which pushed oil prices higher to the prospects of $1.9 trillion in US fiscal stimulus being approved by the weekend to silent central banks in blackout, such a concoction of events is expected to help ramp up price pressures which could ultimately force the Fed into altering its policy settings sooner than expected.
10-year Treasury yields are
making another run for the 1.60% line, with that surge in turn roiling global
equities, especially the more expensive tech stocks. The Nasdaq 100 is a mere
quarter of a percent away from technically entering a correction, that is 10%
down from its peak in February, while the S&P 500 and the Dow Jones index
fell over 1% respectively on Thursday. Asian stocks and US futures are pointing
south at the time of writing.
Over in commodities, spot gold is
languishing below the psychologically important $1700 level and hit its lowest
levels since June, while oil benchmarks are set to post three consecutive days
of gains.
Powell sees no trouble in yields
Yesterday, Jerome Powell mostly
reiterated his same points about the US economy still being “a long way” from
reaching the Fed’s goals, although he did note that the steep climb in bond
yields “caught his attention”. That was hardly the disciplinarian’s tone that
some segments of the markets had hoped for, expecting the Fed Chair to try and
rein in rising yields. Instead, markets pounced on the greater leeway to test
the Fed, with Treasuries being sold and sending yields soaring by as much as 10
basis points following his speech.
Clearly investors are having a
hard time buying into Powell’s current version of events. With the Covid-19
vaccine allowing for economic activity to be restored, coupled with fresh
injections of fiscal stimulus in the pipeline, investors are holding on to the
narrative that inflation could make a roaring comeback.
For the time being, Powell
appears content to patiently watch bond markets from the sidelines, as opposed
to blowing his whistle on market participants who have been getting more unruly
in recent months. Such a stance is likely to leave the door open for further
bouts of volatility in global financial markets, until the Fed sends a clear
signal that enough is enough.
OPEC+ delights oil bulls yet again
OPEC+ shocked markets once more
by choosing to stand pat on its output settings, only making slight tweaks to
its current supply levels for April. Markets had been expecting the cartel to
restore at least 500,000 bpd back into oil markets, a figure which could have
risen to 1.5 million bpd, seeing as how OPEC+ members have become more
comfortable with current price levels. Instead, only Russia and Kazakhstan were
given exemptions to loosen the taps by a combined 150,000 bpd.
Just as Treasury markets are
testing the Fed, so OPEC+ is testing the resilience of the US shale industry,
betting that producers Stateside are no longer in a position to fully capitalise
on the oil price recovery. Saudi Arabia’s energy minister, Prince Abdulaziz bin
Salman, went so far as to declare, “’Drill, baby, drill’ is gone forever”. Oil
bulls are also getting additional support from China’s just-announced 2021
growth target of over 6%, which should buffer the global demand recovery for
the commodity.
While it remains to be seen
whether US shale can upend OPEC’s efforts to eradicate the global over supply
once more, the prospects of $70 Brent is becoming likelier in light of the
latest OPEC+ decision. Higher oil prices in turn are set to fuel expectations
for faster US inflation, which may then hasten the Fed’s tapering and eventual
rate hike.
US jobs report to offer more inflation clues
Today, the February US non-farm
payrolls data is expected to show 198,000 jobs were added, although the
unemployment rate is set to remain at 6.3%. This data print is set to inform
investors about the pace of the jobs market recovery, and whether expectations
for the inflation overshoot are fully warranted. A better-than-expected NFP
print could embolden 10-year yields to breach the 1.60% mark once more while
tipping the Nasdaq into correction territory.
Markets also expect the US Senate
to approve President Joe Biden’s US$1.9 trillion fiscal stimulus package this
weekend, which could trigger more volatility at the onset of the new trading
week, as investors continue raising their expectations for an overheating US
economy.
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