Bloomberg 5/12/21

Fed’s Clarida Plays Down Significance of Rising U.S. Inflation
Fed vice chair blames rise on largely transitory forces
Clarida suggests Fed still ways away from reducing stimulus

Federal Reserve Vice Chairman Richard Clarida played down the significance of rising inflation, saying it was due largely to transitory forces.

“Readings on inflation on a year-over-year basis have recently increased and are likely to rise somewhat further before moderating later this year,” he said in the text of remarks to be delivered to the National Association for Business Economics on Wednesday. However, “I expect inflation to return to -- or perhaps run somewhat above -- our 2% longer-run goal in 2022 and 2023.”

U.S. consumer prices climbed in April by the most since 2009, bringing the year-on-year increase to 4.2%, amid a record increase in used-car costs, the Labor Department reported on Wednesday. The news drove stock market futures prices deeper into the red.

Bloomberg 6/11/21

China’s new data security regime gives President Xi Jinping the power to shut down or fine tech companies as part of his drive to wrest control of vast reams of
data held by giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
Firms found mishandling “core state data” can be forced to cease operations, have their operating licenses revoked or fined up to 10 million yuan ($1.6 million) under a law passed Thursday by the Asian nation’s top legislative body.
Companies that leak sensitive data abroad can be hit with
similar fines and punishments, and those providing electronic
information to overseas law enforcement bodies without
permission can face financial penalties up to 5 million yuan and
business suspensions, according to the law published on the
website of the National People’s Congress.

The law, which goes into effect Sept. 1, stipulates that
major decisions involving data security will be made by central
national security officials.

(IANS 4/21/21)

German Constitutional Court allows support to EU pandemic fund

Germany's Constitutional Court gave the green light on
Wednesday for the government to back the European Union's coronavirus recovery
fund, which has set aside 750 billion euros ($900 billion) to revive the
bloc's economy.

The court threw out an urgent application for German participation in the fund
to be declared unconstitutional. Nevertheless, Wednesday's ruling is not the
last word in the case as the court has yet to make a definitive judgement, DPA
reported.

The court said its "summary examination" had not found a high likelihood of an
infringement of the constitution.

(Bloomberg 3/18/21)

Treasury Yields Top 1.75% After Powell Spurs Bets on Inflation
ING sees ‘no real barrier’ for move higher in 10-year rate
U.S. 10-year yield climbs to highest level since January 2020
Treasury yields breached key levels as traders boosted bets the Federal Reserve will allow inflation to overshoot amid an economic rebound.

Yields on the benchmark 10-year note climbed as much as 11 basis points to 1.75% -- the highest since January 2020, while the 30-year jumped to 2.5% for the first time since August 2019. Market measures of inflation expectations are near multi-year highs, with traders paring back bets the Fed would start tightening as soon as late next year. The dollar rebounded against its major peers. Treasury yields pared some gains but remained elevated during New York morning trading.

The moves came after Fed Chair Jerome Powell indicated he wasn’t concerned over the recent surge in long-term yields -- with his focus still on whether financial conditions remained accommodative. Rates have surged this year on expectations that stimulus spending and vaccine rollouts will fuel a sharper economic recovery and a pickup in inflation.

(Market Watch 3/17/21)

Dow Up 160 Points As Stocks Turn Higher After Fed Policy Announcement

Stock-market investors reacted positively to the Federal Reserve's policy announcement, erasing losses or extending minor gains after the central bank signaled it expected no change in interest rates through 2023 even as inflation slightly overshoots its target. The Dow Jones Industrial Average jumped as much as 200 points at its high and remained up around 160 points.

(Bloomberg 3/17/21)
Greenback Extends Broad Drop Ahead of Powell on Rate Outlook

The greenback is at a session low ahead of Fed Chair Jerome Powell’s press conference as traders sell the dollar on expectations the central bank will be on hold for the foreseeable future.

The Bloomberg Dollar Spot Index is -0.3%; commodity and emerging market currencies leading gainers; yields rise

EUR/USD is +0.5% at 1.1958 after stops are triggered above the key pivot level of 1.1952, the Feb. 5 low; eyes double top ahead of 1.20
USD/JPY erases advance and trades at 108.95

(Bloomberg 3/17/21)

UST 5s30s Curve Steepens 10bp Toward 2021 High, Most in a Year

Treasury yield curve is sharply steeper in response to Federal Reserve message being articulated by Chair Powell following FOMC decision, widening 5s30s spread by 10bp, its biggest increase in a year. Front-end and intermediate yields are falling as Powell sounds dovish tones, saying it’s premature to discuss tapering asset purchases and that an announcement on SLR exemption is planned in the coming days.

Five-year yield declined as much as 6.5bp to 0.764%, while 30-year remains nearly 5bp higher on the day at around 2.42%; 5s30s curve touched 166.3bp, within 1bp of its 2021 high on Feb. 24

10-year yield briefly erased an increase of as much as 7bp to 1.689%, the highest level since January, reached before the FOMC decision; 10-year futures are near best levels of the day around 132-06

Gains led by belly of the curve richened the 2s5s10s fly by 9bp on the day while 2s10s spread exceeded 150bp for the first time since 2015

Long-end lag reflects focus on inflation outlook, and steepening of 5s30s curve by more than 10bp is largest one-day move since March 17, 2020, during the liquidity crisis

(Bloomberg 3/11/21)

Euro Fades, Bond Yields Dip as ECB Signals Faster Bond Purchases

The euro dipped from the day’s highs and German 10-year bond yields declined after the European Central Bank indicated it will step up the pace of purchases under its PEPP program over the next quarter. Rates were kept unchanged as expected.

(Bloomberg 3/4/21)

OPEC+ decided to keep a tight limit on oil production next month, sending prices soaring in a market that had been expecting additional supply.

The agreement is a victory for Saudi Arabia, which has consistently pushed to tighten the market. It leaves the world facing a significant supply squeeze, higher energy costs and the risk of inflation just as widespread vaccination allows economies to emerge from the Covid-19 downturn.

The cartel had been debating whether to restore as much as 1.5 million barrels a day of output. But after being urged to “keep our powder dry” by Saudi Energy Minister Prince Abdulaziz bin Salman, members agreed to hold steady at current levels -- with the exception of modest increases granted to Russia and Kazakhstan.
In a briefing after Thursday’s meeting, the prince went one step further by making the kingdom’s additional 1 million barrel-a-day production cut open ended. He gave no date for phasing out the voluntary reduction and told reporters he is in no hurry to do so.

Russia and Kazakhstan secured exemptions from the deal, allowing them to boost output by 130,000 and 20,000 barrels a day in April, respectively, “due to continued seasonal consumption patterns,” according to a statement posted on OPEC’s website. The two nations were granted similar allowances for February and March.

Policy Validation

(Bloomberg 3/5/21)

China set a conservative economic growth target that signals more restrained monetary and fiscal policies this year, in contrast to other major nations still pumping in stimulus to support growth. The government set a growth target of above 6% for the year, well below what economists forecast, and will narrow the
budget deficit to 3.2% of gross domestic product, Premier Li Keqiang said Friday at the opening of the National People’s Congress. While the fiscal gap is lower than last year, it’s above the 3% expected by many analysts, signaling Beijing still
sees a need for spending to support the recovery. “A target of over 6% will enable all of us to devote full energy to promoting reform, innovation, and high-quality
development,” said Li.

(Bloomberg 3/2/21)

Treasuries Firm; Brainard Says Last Week’s Swing ‘Caught My Eye’

Treasuries continue to trade with a bid tone across belly of the curve, which extended outperformance as Federal Reserve Governor Lael Brainard sounded a dovish tone concerning last week’s bond market volatility.

Outperformance by intermediate sectors tightened 2s5s10s fly by 4.5bp on the day as 5-year yields shed 2.5bp outright Treasury 10-year note futures are near session highs, with yields slightly richer vs Monday’s close, while 30-year yields remain ~2bp cheaper on the day
Brainard said she’s paying close attention to market developments and that the speed of last week’s moves caught her eye

Around the same time Fed’s Daly said the central bank needs to be patient in implementing its new monetary policy strategy


Policy Validation

(Bloomberg 3/2/21)

Brainard Says Recent Bond Market Moves Have ‘Caught’ Her Eye
Fed governor cites improving outlook while noting risks remain
Says economy remains far from Fed’s goals for inflation, jobsBy Craig Torres

Federal Reserve Governor Lael Brainard said it will take “some time” to meet the conditions laid out by the U.S. central bank for reducing the pace of its massive bond purchases, while noting recent bond market volatility.

“I am paying close attention to market developments,” she said Tuesday in response to a question after giving a speech. “Some of those moves last week, and the speed of the moves, caught my eye. I would be concerned if disorderly conditions or of a persistent tightening in financial conditions that could slow progress towards our goal.”

(Bloomberg 3/2/21)

Treasuries Firm; Brainard Says Last Week’s Swing ‘Caught My Eye’

Treasuries continue to trade with a bid tone across belly of the curve, which extended outperformance as Federal Reserve Governor Lael Brainard sounded a dovish tone concerning last week’s bond market volatility.
Outperformance by intermediate sectors tightened 2s5s10s fly by 4.5bp on the day as 5-year yields shed 2.5bp outright
Treasury 10-year note futures are near session highs, with yields slightly richer vs Monday’s close, while 30-year yields remain ~2bp cheaper on the day

Policy Validation

(MarketWatch 3/2/21)

Fed's Brainard expresses unease about last week's bond market turmoil

Size and speed of last week's bond market selloff caught her eye, Fed Governor says
Federal Reserve Governor Lael Brainard on Tuesday became the first top official at the central bank to express unease about last week's sharp rise in longer-term U.S. Treasury yields.
Asked about the bond market during a talk at the Council of Foreign Relations, Brainard said she was "paying close attention to market developments."
"Some of those moves last week and the speed of the moves caught my eye," Brainard said.
"I would be concerned if I saw disorderly conditions or persistent tightening in financial conditions that could slow progress" towards the central bank's twin goals of a strong labor market and stable 2% longer-run inflation.

Policy Validation

Bloomberg 2/23/21

Powell Signals Continued Fed Aid for Economy He Sees Improving
By Rich Miller
Federal Reserve Chairman Jerome Powell signaled that the central bank was nowhere close to pulling back on its support for the pandemic-damaged U.S. economy even as he voiced expectations for a return to more normal, improved activity later this year.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said in the text of testimony to be delivered Tuesday to the Senate Banking Committee.

Policy Validation

(Bloomberg 2/23/21)

*POWELL: RATES ARE MOVING UP DUE TO HIGHER GROWTH EXPECTATIONS
*POWELL: LOOK AT BROAD RANGE OF CONDITIONS, INCLUDING YIELDS
*POWELL: MOVE IN YIELDS REFLECTS MORE CONFIDENCE IN THE ECONOMY
*POWELL: EXPECT US TO MOVE CAREFULLY AND PATIENTLY OVER TIME
*POWELL: THERE'S LONG WAY TO GO, WE'RE 10M JOBS BELOW PRE-VIRUS

(Bloomberg 3/19/21)

The Bank of Japan unveiled a set of carefully crafted policy tweaks aimed at giving itself more flexibility to keep up its long quest to revive inflation.

The bank set out a wider-than-previously-thought movement range for bond yields and scrapped a buying target for stock funds at the end of a three-month policy review.
While the currency and bond markets largely took the moves in stride, the BOJ’s decision to focus its purchasing of exchange-traded funds on the wider Topix index drove down shares on the Nikkei 225.

Many of the tweaks will give the BOJ greater scope to buy fewer assets and could be viewed as a stepping back from stimulus, but the central bank characterized the changes as shoring up the effectiveness and sustainability of its measures over the longer run.

Policy Validation

(Reuters 2/12/21)

ROME — Finance ministers from the Group of Seven (G7) rich nations have committed to continuing coordinated action to support the economy, Italian Economy Minister Roberto Gualtieri said on Friday.

“G7 ministers confirmed today their common and coordinated commitment to support the recovery and to set the conditions for a sustainable and inclusive growth. The withdrawal of policy support is premature,” he wrote on Twitter after an online call with his G7 peers.

(National Post 2/12/21)

Japan's Aso: G7 finmins discussed support for low-income countries

Financial leaders from the Group of Seven (G7) rich nations discussed support for low-income countries and new allocation of special drawing rights at the International Monetary Fund (IMF) in a virtual meeting, Japanese Finance Minister Taro Aso said on Friday.

Aso was speaking to reporters after attending Friday's online meeting with his G7 peers under the United Kingdom as new chair.

(Bloomberg 2/12/21)

In her first call with foreign counterparts and central bankers from the G-7, Yellen said that “the time to go big is now” and that the group should focus on how to help the economy, the U.S. Treasury Department said in a statement after the virtual meeting held on Friday. The U.K. is the rotating head of the G-7 this year.
The U.S. is leaning toward backing an increase in the IMF’s special drawing rights by as much as $500 billion, Bloomberg News reported earlier this month. The fund has been lobbying for more help to support developing nations against the Covid-19 crisis. A decision could come as soon as this month.

Policy Validation

FT 2/10/21

Jay Powell stressed the importance of “patiently accommodative” monetary policy to support the struggling US labour market, warning that achieving full employment in the world’s largest economy will not be easy. In prepared remarks to the Economic Club of New York on Wednesday, the chair of the Federal Reserve said US employment was far from its pre-pandemic level. He did not reveal any anxiety about a rise in inflation later this year triggered by President Joe Biden’s $1.9tn fiscal stimulus plan. “Despite the surprising speed of recovery early on, we are still very far from a strong labour market whose benefits are broadly shared,” Powell said. “Employment in January of this year was nearly 10m below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath.” Powell also indicated that US policymakers, including health officials, fiscal authorities and central bankers, would still have plenty of work to do in order to close that gap, suggesting the Fed did not see a quick end in sight to the economic downturn triggered by the pandemic.

Policy Validation

(Dow Jones 2/11/21)

Fed's Daly Sees Central Bank Maintaining Its Bond-Buying Pace Through 2021

Federal Reserve Bank of San Francisco leader Mary Daly said the U.S. central bank is unlikely to pull back on its bond-buying stimulus this year, and that another round of government aid shouldn't overheat the economy.
The official said she continues to expect the U.S. economy to pick up speed over the second half of the year, as vaccinations roll out and allow the economy to emerge from the shadows of the coronavirus pandemic. But even as the nation emerges from the crisis, it won't yet be time for the central bank to pull back on its $120 billion a month in bond buying, she told The Wall Street Journal on Wednesday.

"For now, we have policy in a good place," Ms. Daly said. "If you take the lens of my modal outlook, then it's really continuing to purchase at the current pace through the end of this year."

(Bloomberg 2/16/21)

China is exploring whether it can hurt U.S. defense contractors by limiting supplies of rare-earth minerals that are critical to the industry, the Financial Times reported. Industry executives said government officials had asked them how badly companies in the U.S. and Europe would be affected if China restricted rare-earth exports during a bilateral dispute, the FT reported, citing people it didn’t identify involved in the consultation.