Faster Inflation Is All The Rage

From another OPEC+ surprise which spurred oil prices higher, and the prospects of $1.9 trillion in US fiscal stimulus being approved by the weekend, such a concoction of events are expected to ramp up price pressures which could ultimately commit the Fed into altering its policy settings sooner than expected.

10-year Treasury yields are making another run for the 1.60% line, with that surge in turn roiling global equities, especially the more expensive tech stocks. The Nasdaq 100 is a mere quarter of one percentage point away from technically entering a correction, while the S&P 500 and the Dow Jones index fell over 1% respectively on Thursday. Asian stocks and US futures are pointing firmly south at the time of writing.

Over in commodities, spot gold is languishing below the psychologically-important $1700 level to hit its lowest levels since June, while oil benchmarks are set to post three consecutive days of gains.

Powell sees no trouble yet in yields

Powell mostly reiterated his same points about the US economy still being “a long way” from reaching the Fed’s goals, although he did note that the steep climb in bond yields “caught his attention”. That was hardly the disciplinarian’s tone that some segments of the markets had hoped for, expecting the Fed Chair to try and rein in rising yields. Instead, markets pounced on the greater leeway to test the Fed, with more Treasuries being offloaded that sent yields soaring by as much as 10 basis points following his speech.

Clearly investors are having a hard time buying into Powell’s current version of events. With the Covid-19 vaccine allowing for economic activity to be restored, coupled with fresh injections of fiscal stimulus in the pipeline, investors are holding on to the narrative that inflation could make a roaring comeback.

For the time being, Powell appears content to patiently watch bond markets from the sidelines, as opposed to blowing his whistle on market participants who have been getting more unruly in recent months.

“Such a stance is likely to leave the door open for further bouts of volatility in global financial markets, until the Fed sends a clear signal that enough is enough.”

OPEC+’s delights oil bulls again

OPEC+ shocked markets once more by choosing to stand pat on its output settings, only making slight tweaks to its current supply levels for April. Markets had been expecting the cartel to restore at least 500,000 bpd back into oil markets, a figure which could have risen to 1.5 million bpd, seeing as how OPEC+ members have become more comfortable with current price levels. Instead, only Russia and Kazakhstan were given exemptions to loosen the taps by a combined 150,000 bpd.

Just as Treasury markets are testing the Fed, so too is OPEC+ testing the resilience of the US shale industry, betting that producers Stateside are no longer in a position to fully capitalize on the oil price recovery. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, went so far as to declare, “Drill, baby, drill is gone forever”.

“Oil bulls are also receiving additional support from China’s just-announced 2021 growth target of over 6%, which should buffer the global demand recovery for the commodity.”

While it remains to be seen whether US shale can upend OPEC’s efforts to eradicate the global oversupply once more, the prospects of $70/bbl Brent is becoming likelier in light of the latest OPEC+ decision. Higher oil prices in turn are set to fuel expectations for faster US inflation, which may then hasten the Fed’s tapering and eventual rate hike.

US jobs report to offer more inflation clues

Today, the February US non-farm payrolls data is expected to show 198,000 jobs added, although the unemployment rate is set to remain at 6.3%. This data print is set to inform investors about the pace of the jobs market recovery, and whether expectations for the inflation overshoot are fully warranted.

“A better-than-expected NFP print could embolden 10-year yields to breach the 1.60% mark once more while tipping the Nasdaq into correction territory.”

Then, should the US Senate approve President Joe Biden’s US$1.9 trillion fiscal stimulus package this weekend, that could trigger more volatility in global markets at the onset of the new trading week, as investors continue raising their expectations for an overheating US economy.

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