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- JayPow & The Bonds, OPEC Surprise & NFP's
JayPow & The Bonds, OPEC Surprise & NFP's
Jerome Powell is the worst Federal Reserve chairman ever, isn't doing his job and should generally be ashamed of himself.
Or so Twitter tells me...
Then there's this guy...
Both IG and HY CDX spreads did widen a bit toward the end of the day, but cash spreads weer basically unch, IG +1.8, HY +1.2. And issuance again well > $10b.
I'll go further: for a Fed that might b having butterflies about frenzied mkts, this is goldilocks.$SPY $QQQ $IWM https://t.co/lbt4W8frXn— FZucchi (@FZucchi) March 4, 2021
Aside from an acknowledgement that last weeks' moves in bond markets 'caught his eye', this was very much a repeat of Powell's recent statements.
Reuters have a good summary here:
So what are bond markets 'telling' us?
Federal Reserve Chairman Jerome Powell said at the #WSJJobsSummit that there is no plan to raise interest rates until labor-market conditions are consistent with maximum employment and inflation is sustainably at 2% https://t.co/gnnQH0nj7w pic.twitter.com/NFzOCAbYgN— The Wall Street Journal (@WSJ) March 4, 2021
The first question sums up where we are...
"The market now believes the Fed will raise rates earlier and faster than a week ago, are you saying that's consistent with your outcome-based policy guidance?"
Whilst the recent bond moves are loosely related to the inflation narrative, it's arguably the faster part of the equation that's driving bonds currently.
The market believes that the Fed will tighten aggressively when the time comes.
Traders are speculating that a 25bps hike comes increasingly sooner...
U.S. swaps are now pricing about 80% chance that the Federal Reserve hike rates 25 basis points by DECEMBER 2022.
15 meetings time.— Stephen Spratt (@StephenSpratt) March 5, 2021
Eurodollars imply three hikes (75bps) from the Fed by the end of 2023...
Yield differential between Eurodollar futures – Sept 2023 to March 2024 - Bloomberg/Chris Weston
And the below chart suggests that inflation is not the true driver (comments below)
Bespoke Invest
What to make of all this?
In our view, the narrative that markets are worried about inflation is inconsistent with Treasury market movements in recent weeks.
Instead, we see a market that is pricing in a much tighter Fed once interest rates do start to rise. Whether that will prove true or not is an open question, but what we can say is that inflation expectations are unlikely to be driving bond selling given where changes in yield are taking place on the curve and the performance of inflation pricing over the last few weeks.
Makes a lot more sense than that sustained inflation narrative...
Australia's 'no hikes until 2024' stance may be challenged too (especially if markets believe the Fed will start hiking at the end of 2022)
ANZ Australian Macro Weekly: ANZ Job Ads point to #unemployment being “comfortably below 6%” by end of 2021, well ahead of most forecasters. This will see market rate expectations challenge #RBA messaging. pic.twitter.com/tZo7WlPUPr— ANZ_Research (@ANZ_Research) March 5, 2021
The BOJ caps the 10-year bond yield around zero under a policy dubbed yield curve control (YCC), and currently allows the benchmark yield to move 40 basis points around its 0% target.
Markets have been rife with speculation the BOJ would widen that band and allow yields to move higher, but Kuroda played down that possibility on Friday.
“It’s something we will discuss at the (March) review. But I don’t think it’s necessary or appropriate to sharply widen the band,” Kuroda told parliament.
“We need to keep the yield curve stably low” as the economy still suffers the blow from the COVID-19 pandemic, he said. “I don’t think we need to widen the band.”
Kuroda’s remarks sent yields on 10-year Japanese government bonds down three points to 0.105%.
OPEC - Oil's Central Bank
OPEC continued their supply management exercise wuth yesterday's decision.
Russia and Kazakhstan will be easing by a combined 150k bpd, far lower than the 1.5 million barrels per day some were anticipating.
The Saudis surprised everyone with the voluntary cut at the previous meeting and repeated the trick again by maintaining the 1 million bpd reduction for another month.
Oil rallied to new highs, and banks duly updated their forecasts
Will these prices tempt U.S. shale producers back into production?
The Saudi energy minister comment that “drill baby, drill is gone forever” suggests that they believe they can push prices even higher, without the risk of losing market share...
India aren't happy...
#OOTT | Indian Oil Minister: Decision By OPEC+ To Continue With Production Cuts Will Undermine Consumption Led Recovery - RTRS
- Will Hurt Consumers Specially In ‘Our Price Sensitive Market’— LiveSquawk (@LiveSquawk) March 5, 2021
Diverging Recovery Paths
Via @adam_tooze
JPMORGAN: The spread between the US and European recoveries continues to widen, driven by “more concentrated fiscal support in the US. ... The pending $1.9tn fiscal relief package in the US should exacerbate the divergence in growth.” pic.twitter.com/66iyt9hsK3— Carl Quintanilla (@carlquintanilla) March 4, 2021
The sinking ARK
Cathie Wood is legit selling all her liquid positions and doubling down.
Wow. https://t.co/GuOQhHqG8U— HFI Research (@HFI_Research) March 5, 2021
These are the most oversold of the ~50 $ARKK holdings as of yesterday's close. Dozens now 15-40% below their 50-DMAs. Most of these were that far above their 50-DMAs just a few weeks ago. pic.twitter.com/DNQG9uLFP1— Bespoke (@bespokeinvest) March 4, 2021
Something, something... before a fall
He wasn't kidding 🤔 $SPCE $IPOE $CLOV $OPEN https://t.co/FPTie99wF5 pic.twitter.com/NREb2q69GP— Nathan Michaud (@InvestorsLive) March 5, 2021
NFP's Today's 'Highlight'
Estimates range between +410k & -200k
🇺🇸🎯 Primary Dealer #NFPGuesses:
Citi +410K
Jeff +360K
SG +350K
TD +300K
Amh. P +275K
CS +250K
BoA +225K
GS +225K
WF +210K
BMO +200K
DB +200K
JPM +200K
Nom +200K
UBS +200K
Miz +175K
Scotia +175K
HSBC +150K
BNP +140K
Barx +100K
Daiwa +100K
MS +60K
NatWest -35K
RBC -100K
Med +200K— Anthony Barton (@ABartonMacro) March 5, 2021
GOLDMAN: “We estimate nonfarm payrolls rose 225k in February, above consensus of +198k.” pic.twitter.com/vXb7pdA0y8— Carl Quintanilla (@carlquintanilla) March 4, 2021
Huge divergences in forecasts, but reading between the headlines in labour market data will be important going forward.
Powell has made it crystal clear that people dropping out of the labour force (i.e. not counted in official unemployment rate) is a big problem, and they will look at all metrics to define 'full employment'.
"We're 10 million jobs below where we were in February of 2020.
10 million payroll jobs. So there's a long way to go," - Powell
Since the start of the coronavirus crisis, the US labour force has lost 4.3m people, including 2.5m women, who are neither in work nor searching for it.
The question is whether people will return to the workforce or if they have permanently left...
The FT had a report yesterday covering this:
