The ongoing rate curve repricing and the risk asset reaction perfectly illustrate how hostage investors have worryingly become reliant on easy money policies.
A no push back 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.
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 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 bond desks will continue to push the yield envelope higher.
If it felt we were in the eye of the storm earlier this week, we are waist-deep in the policy repricing soup now. Investors are worried about the perpetual printing machines of easy monetary policy throttling down. Indeed, the ongoing rate curve repricing and the 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. Investors strategy is to get out of the soup and get 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 Feb. 19, 2020. That saw US equities fall again. 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.
Oil Markets
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 with $1,500 drops two days in a row. A resolution to Nornickel's flooding issues, Tesla's (NASDAQ:TSLA) 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.
Forex
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, USD/JPY has extended its 2021 uptrend on the back of equity market weakness and yield divergence.
The EUR/USD is lower in a reaction function to higher US yields. The global reflation story does not feed through to EU rates how it feeds through fixed-income markets run by more permissive central banks like the FED.
Gold Markets
Gold continues to struggle in a trend that starting right out of the gates in 2021. And by failing to $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 COVID vaccines roll out in the US.