Going Dotty
Today's FOMC decision should set the tone for markets for the foreseeable future. The focus in Europe is on the progress of vaccinations. For equity markets, it's a time for taking stock.
Fed Chair Jerome Powell can be happy with the impact of recent Fed communication. Markets have well digested the refusal to express concern about higher yields. The S&P 500 hardly wobbled and is trading at all-time highs, while US Treasury yields have consolidated.
It's hard to imagine a better outcome for Powell: by keeping his calm and getting other officials in-line, he has allowed for more realistic pricing of the economic outlook while at the same time preserving the Fed's dovish credibility, at least so far.
There is no reason to change the Fed's message regarding longer end yields and the curve. The FOMC would be concerned 'by disorderly conditions in markets or persistent tightening in financial conditions that threaten our goals' achievement.
I do not know where the hurdle of such 'tightening' is, but any rhetorical push back on markets could be effective, which will keep traders on guard, at least for today.
Will the FOMC want to lean on the pricing of rates lift-off? I think that Powell will indeed be somewhat concerned by recently shifting expectations towards earlier and steeper hikes.
The way to address this would be by stressing that conditions are still far from where they will need to be for the Fed even to start thinking about the first timid step off the QE pedal and that this is unlikely to happen this year. I think this is the center of risk, and I still don't think Bond and FX traders are buying what the Fed is selling; hence the dots are, of course, a complication.
Some have argued that Powell might lean on regional presidents to keep their dots dovish. Given the Fed system's weight on the regional research departments' independence and quality, I doubt this will happen. More likely, as the massive fiscal stimulus is being included in the models, the forecasts and hence the dots will move higher, even if some might doubt the longer-term impact of the fiscal package.
Oil Lower As IEA Doesn't See Oil Super-Cycle
One of the takeaways from yesterday's BAML fund manager survey was the idea of a commodity super-cycle taking hold, which led to the commodity allocation reaching an all-time high.
The last time investors were this bullish commodities was back in February 2011, when Brent was trading north of $100/bbl.
Comments from the IEA this morning are at odds with that view (for oil markets anyway). In its latest monthly report, the IEA said oil markets weren't on the verge of a new price super-cycle, as supply remains plentiful.
As demand visibly increases and catches up with the sentiment, it will encourage OPEC and other oil producing-nation to ease production curbs. And these extra barrels coming back to the market could prove to be a major headwind for oil prices this year.
Europe Today
Pressure is increasing on the euro amid slow progress on vaccinations across the continent, renewed lockdowns, and political squabbling.
Over the past few days, the position squaring marginally shifts the risk dial to the downside in the near term, with expectations elevated for a very dovish and nuanced message from Fed Chair Powell today. This might be a tricky needle to thread.