See the latest Australian dollar analysis here:
The Australian dollar took off last night after the FOMC meeting concluded with a dovish statement. Yet, under the bonnet, the Fed did shift to a more hawkish outlook and the long-end of the bond curve barely shrugged as yields marched higher. In short, the meeting delivered exactly what I expected, a passive shift in a hawkish direction within a still dovish context. To the charts.
DXY was whacked:
The Australian dollar took off:
Oil fell and gold lifted:
Base metals did little:
Miners were weak in context:
EM stocks still look perilously poised:
But junk lapped it up. No need for Fed to ease here:
Crucially, though, US yields were squashed as the short-end and climbed at the long, the exact opposite of what a dovish Fed would want given the latter determines mortgage rates:
Stonks were bid but forgive me if I say it was a little half-hearted:
So, it was a dovish statement:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
But, the outlook was raised materially for growth and inflation short term, less so long:
As expected, the dots shifted a little hawkish:
So, we have a situation now where the Fed is sitting on the short-end to juice growth until it will suddenly deliver 10-12 rate hikes in 2024. On top of that, its outlook already meets 2% inflation yet it still has to incorporate forthcoming mandatory low wage rises plus another $2-4tr in infrastructure spending that adds 1-2% to GDP per annum out past 2023.
Why would anyone buy the ten-year bond in this situation? They won’t. The one thing that the Fed has not done is to choke off the yield shock as we all now know that yields will have to lift by another 1% before 2024. This, as the months ahead include the base effect inflation spike, the debate and delivery of massive new fiscal, and, before long, rumour will grow of tapering asset purchases early next year.
There is nothing here that changes my mind about US growth, inflation and yield leadership meaning the bottom is in for DXY, the top is in for AUD and there’s trouble ahead for tech, EM and commodities:
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Well your commentary somewhat toned down my initial view which was:
Powell states that he sees the inflation bump as short-lived. As soon as he does that the USD drops heavily and commodities are bid. I wonder what the dipstick will say when that “bump” starts to become a hill. They don’t want ‘disorderly” but when they continue to work towards a disorderly outcome, you wonder.
https://www.bloomberg.com/news/articles/2021-03-11/inflation-is-already-creeping-into-some-corners-of-the-world
As for wages, I noted this article this morning too
https://www.bloomberg.com/news/articles/2021-03-17/the-curious-case-of-hard-to-find-workers?srnd=premium
As for oil, there was a “surprise crude build” apparently ……… don’t worry there will be a surprise crude draw next week.
Are workers hard to find because employers are offering garbage wages?
Dunno …. so much is hidden with their version of Jobkeeper/Seeker etc. They would have to be garbage if ‘people who could work are choosing to survive on extended unemployment benefits instead”.
Update
https://www.zerohedge.com/markets/americas-small-businesses-govt-life-support-debt-apocalypse-can-kicked
Many of the small companies are become zombified. Reliant on handouts and cut their internals back to bugger all. Likely pays are bare bones just to stay in the game
Erik Townsend, a commentator I know many on here follow on Macrovoices, is predicting oil at all time highs by end of 2024, he’s in the camp predicting another commodity super cycle. I tend to agree with him.
Meh. There are 12mb/d offline right now. Sure, there’s underinvestment but US shale is far from tapped out yet. If we going to have an EV revolution then oil demand is going to peak as well.
I am bullish oil short term but only until the supply discipline starts to break.
As for other commods, very skeptical for bulks, less so for green base metals but still circumspect given recycling will surge as EVs grow.
There’s a lot of Johnny come lately balderdash in commods right now.
OPEC will push it until they get pushed back. Surely the pushback won’t ever stop.
Oil price rally tests drilling discipline in US shale industry
this was meant as a reply to “run to the hills”
But Angus and Scotty from Marketing have our back on oil supply? The LNP best at everything managers.
See my reply to DLS meant for your comment
They did make some moves to try to encourage Treasuries to be parked at the Fed instead of the banks….RRP lifted from $30 billion to $ 80billion per counterparty and ended the CMBS scheme
https://twitter.com/EPBResearch/status/1372248927890599936
They obviously think the fiscal multiplier from the stimulus is too low now to last long…….Ms Yellen might have other ideas
https://twitter.com/EconguyRosie/status/1372251374956781568
Feels like a limp bounce to me – my guy feel is that the market will keep pushing up bond yields.
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