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By Edward Moya, Senior Market Analyst, New York, OANDA,
US stocks should have a boring lead up heading into a wrath of central bank decisions, with many focusing on the Fed. Financial markets should teeter from the cyclical rotation trade to this big-tech discount might be too good to pass up.
Wall Street seems to be posturing for the Fed to cap the rally in Treasury yields and for oil prices to pullback. Financials and Energy stocks are leading the decline as Utilities and Consumer discretionary stocks post modest gains.
Global equities don’t want to rally until Europe’s outlook improves and the AstraZeneca vaccine suspensions across France, Germany, and Italy is very damaging. Confidence in Covid vaccines in Europe is taking a hit despite assurances from the EMA. Until Covid cases broadly trend lower, European equities could struggle.
FOMC
The Fed can’t be happy with how quickly the steepening of the curve is happening, but they will not deviate from the stance that if inflation does occur, policymakers will be able to deal with it. Many traders will primarily focus on the dot plots and everyone is likely to upgrade their growth projections, but mostly remain stubbornly cautious with calls for a first Federal Funds rate hike.
Fed Chair Powell will rely on the short-term risks to the outlook to defend his ultra-easy monetary stance. Wall Street should expect the Fed to signal interest rates will remain near zero through 2023.
Powell will likely replay his best hits when discussing inflation, noting that price increases later in the year won’t be large or persistent. The summertime is when inflation could rear its ugly head, so Powell should be able to push back any concerns until then.
US growth exceptionalism due to Covid vaccine rollout success will make it harder for Powell to deflect calls for future inflation and tightening. Powell will likely focus on how Covid cases and hospitalisations might be rising in some states and that could pose a key risk to the reopening of the economy.
The Fed could deliver qualitative guidance on how it will adjust its purchases, but that bazooka might best be used if the 10-year Treasury yield is north of 1.75%. Operation Twist, Weighted Average Maturity (WAM) targeting, or yield curve control (YCC) are all tools that the Fed could resort to later this year.
BOE
BOE is widely expected to keep interest rates steady and make no changes to their current pace of stimulus. The steady rise in Gilt yields is a reflection of an improving economy and with the next policy meeting occurring on May 6th, Governor Bailey will make sure not to commit to anything. Any short-term risks to the outlook will clearly be visible by the May meeting, and if the economy continues to improve, policymakers could commit to slowing their purchases.
BOJ
The Bank of Japan (BOJ) is widely expected to keep interest rates unchanged and reiterate that it is too early to consider the exit from its ultra-easy policy. This policy meeting could clear up many questions on thresholds: how far bond yields can deviate from their target and some outcomes from the negative rate study. The BOJ wants to avoid a taper tantrum so any tweaks to their yield curve control program should be minimal.
Other CBs
Romania wanted to cut interest rates, but high inflation prevented them. The benchmark rate remained at the record low of 1.25%. Inflation is at a 1-year high, but Covid cases are trending higher again. The Romanian central bank will likely refrain from hiking anytime soon until the economy is on sound footing.
Sweden Gov Ingves speaks in Parliament and will have to address whether low inflation warrants a return to negative territory for interest rates. Sweden’s economic recovery is not terrible, so the Riksbank should be able to hold off on rate cuts.
Russia is widely expected to keep interest rates steady and cue up a path for interest rate hikes later this year.
Oil
Crude prices got hit with a trifecta of bad news: The dollar continues to rally as many currency traders unwind their bearish bets, WTI crude’s nearest timespread snapped into a bearish contango structure, and as some states show a rise in COVID cases.
It looks like the bullish crude moves that stemmed from the Texas deep freeze and the reopening of the economy are now fully priced in. Oil prices have been extremely bullish since November and now it seems that we could finally be entering a consolidation period. Despite record growth for US money supply and firm commitment of no tightening from the Fed, the dollar refuses to break due to a better outlook when compared with the rest of the world, especially Europe. A stronger dollar should start to weigh on commodities and that should prevent oil prices from rallying too much.
A bearish contango structure for WTI is not surprising many given the strong build over the past couple of weeks. The crude demand outlook still remains the key for higher prices and if short-term risks continue to grow due to virus variants, oil prices could be in for modest 10% pullback.
Covid cases are rising in New Jersey and Michigan and if that trend spreads across the nation, that could really derail some of the accelerated reopening measures. Vaccinations are still going well, but short-term risks remain elevated.
Gold
The gold market is clearly expecting the Fed to reaffirm their dovish commitment. Treasury yields remain elevated and expectations are high that the Fed’s hand will be forced sometime soon. The Fed is saving the bazooka of Operation Twist or yield curve control (YCC) for a massive move higher with Treasury yields. In the meantime, the Fed could shift a portion of its asset purchases from mortgage-backed securities to Treasuries.
Gold prices need the Fed to deliver something on Wednesday, otherwise it could get ugly very fast. Gold could attempt a run towards $1750 leading up to Wednesday’s FOMC policy decision.
Bitcoin
Bitcoin’s rollercoaster ride was intense and for many they were unable to take advantage of it. The drawback for some crypto derivatives is that they don’t trade 24/7 like Bitcoin. Over the weekend, the rise above $61,000 was sparked by some stimulus checks, growing NFT purchase interest, continued support from Elon Musk, and as many traders locked in on hefty profits.
The Bitcoin pullback accelerated after many Bitcoin whales moved their money to the exchanges and after the Reuters story on India’s potential crypto ban included punishment for holding or mining Bitcoin, the strictest stance by any major government. The thing that scares cryptocurrency traders the most is regulation and India’s potential punishment scared many in the crypto world. China has already banned mining and trading but refrained from fining individuals for holding cryptocurrencies.
