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Faster Inflation is all the Market’s Rage

By Han Tan, Market Analyst at FXTM


The first week of March has given investors more reasons to expect faster inflation.

From another OPEC+ surprise which pushed oil prices higher to the prospects of $1.9 trillion in US fiscal stimulus being approved by the weekend to silent central banks in blackout, such a concoction of events is expected to help ramp up price pressures which could ultimately force 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 a percent away from technically entering a correction, that is 10% down from its peak in February, while the S&P 500 and the Dow Jones index fell over 1% respectively on Thursday. Asian stocks and US futures are pointing south at the time of writing.

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

Powell sees no trouble in yields

Yesterday, Jerome 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 Treasuries being sold and sending 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+ delights oil bulls yet 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 OPEC+ is testing the resilience of the US shale industry, betting that producers Stateside are no longer in a position to fully capitalise 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 getting 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 over supply once more, the prospects of $70 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 were 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.

Markets also expect the US Senate to approve President Joe Biden’s US$1.9 trillion fiscal stimulus package this weekend, which could trigger more volatility at the onset of the new trading week, as investors continue raising their expectations for an overheating US economy.

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