Home
Health and Wellness Shows (Malaysia) 
Health and Wellness Shows (Indonesia) 
Health and Wellness Shows (Singapore) 
By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Between Reflation & Restraint
Reflation is making its presence felt in the room; either by way of its accompaniments and/or making a cameo amongst the wider cast of US economic recovery. Reinforcement of US reflation continues to resonate in US data consumer confidence surge; which backed up solid US retail sales earlier; benefitting from fiscal cash transfers to households.
Moreover, President Biden’s executive order to push $15/hour minimum Federal wages over the line (currently $10.95/hour), while arguably not likely to have a direct and imminent impact on $7.25/hour in the private sector, is nonetheless yet another reflationary impulse.
And record high prices in the commodity space, with iron ore prices cracking 2011 super-cycle levels with a print over $193 and copper flirting with 2011 peaks square with the traction gained from reflationary policies stoking demand recovery.
Oil may not be have re-written any record, but its buoyancy is still a nod to reflation in the context of the early stages of economic recovery from the pandemic.
These reflationary ripples were swept UST yields higher led by the the long-end. 10Y UST yields were up 6-7bps to 1.63%; and 10Y-2Y spreads widened more than 5bps to 145bps.
Higher (nominal and real) UST yields supported USD tone; taking the edge off sub-1.21 EUR; lifting USD/JPY past mid-108; knocking AUD back to mid-0.77; buoying USD/SGD above mid-1.32.
Resurgent inflation expectations, as per 10Y Break-even also rose ~4-5bps to above 2.4%, tracking the commodity run in challenging 2011 high certainly keep reflation at the fore.
But the wider point and the bigger driver of markets, as equities shuffled nervously ahead of the FOMC meeting today, is arguably just how much restraint the Fed will exercise. Because what markets may really be more sensitive to is the Fed’s reaction function to reflation (asserting itself in the recovery, commodity prices, cost push/inflation expectations).
FOMC: Teasing Out the Tone
What’s more, without upgraded economic pronouncements or revised policy rate projections (“Dot Plot”) scheduled for this meeting, the absence of quantitative revisions to key parameters means that markets will be inclined to scrutinize more nuanced shifts in tone.
And there are two things to note on that front.
First, will be getting a pulse on how flexible average inflation targeting (FAIT) will impact the Fed’s policy calculus/reaction function (to reflation not just creeping, but galloping). Specifically, getting a handle on the Fed’s tolerance and (realigned) triggers for inflation overshoot and allowing the economy to “run hot”; as was the change to policy framework.
Second, would be getting a sense of how various policy tools are assessed differently in terms of continued appropriateness and calibration.
And at the fore of this is the tone of the Fed in terms of “taper”, which Fed Powell has suggested will be “well before” rate hikes.
Teasing out whether the implied timeline for “taper”, and whether this may be in 2022, will be key in determining how the UST yield curve will behave.
So UST yield curve steepening is likely to be highly reliant on how the Fed’s tone evolves over the course of the next few meetings.
And this meeting will kick off this tone tests.
Source: Mizuho Bank Ltd
