Fed’s Inaction on Rising Long-Term Interest Rates Sends Dollar Higher

March 5, 2021

Investors had been hoping to hear some voiced protest against the steepening U.S. yield curve from Fed Chairman Powell’s speech yesterday, but it wasn’t to be. Powell expressed a lack of worry about the development, while reaffirming that Fed tightening is years away even if U.S. employment and price growth outpaces the path assumed by officials.

Powell’s unconcern sent the 10-year Treasury yield to a 13-month high of 1.57%, and the dollar has strengthened, too. At 91.91, the DXY trade-weighted dollar index is 0.3% stronger on the day. It has risen 2.3% in the past two weeks and is at its strongest trade-weighted level this morning since Thanksgiving. Against specific currencies overnight, the dollar advanced 0.9% versus the kiwi, 0.8% relative to the Australian dollar, 0.6% against the Mexican peso, 0.5% versus the yen and sterling, 0.3% vis-a-vis the euro, loonie and yuan and 0.1% versus the Swiss franc.

The next big piece of information will be the release of U.S. February labor statistics due an hour from now. Markets anticipate an unchanged jobless rate of 6.3% and somewhat faster growth in employment of around 180,000, which would leave such still almost 10 million short of the pre-pandemic level. The vast jobs gap from a year ago is why Powell is counseling market patience and not to assume a policy reaction to short-term economic developments.

The first week of March has been a volatile one for global equities, but uncertainty about today’s U.S. jobs report has limited movement so far today. Equities closed down 0.7% in Australia, 0.6% in Indonesia and South Korea, 0.5% in Hong Kong, 0.2% in Japan, but unchanged in China. The German Dax is down 0.5%, while the British Ftse shows a 0.5% gain. U.S. futures are only marginally apart from Thursday closing levels.

The 10-year Treasury yield has settled back to 1.55%, and the 10-year Japanese JGB yield is down four basis points. But the comparable British gilt yield has risen 3 bps.

One big mover today has been a 2.4% jump in the price of West Texas Intermediate oil, which responded to yesterday’s decision by OPEC+ oil ministers not to change production quotas next month. Gold, which often moves inversely with the dollar, slid under the $1,700 per ounce level to an 8-month low.

German industrial orders increased 1.4% in January, twice as much as expected and were more than 3% greater than their pre-pandemic level of February 2020. Foreign demand for German capital goods powered the increase, whereas total domestic orders actually fell.

Investors were heartened by Chinese Premier Li’s revelation of the government’s macroeconomic expectations for 2021 including GDP growth of more than 6.0% and inflation of about 3%.

Italian retail sales in January suffered because of the intensifying Covid crisis. Sales fell 3.0% on month and also recorded the largest year-on-year drop (6.8%) since April.

The French current account deficit widened to a 2-month high of EUR 1.6 billion in January. The deficit in 2020 of EUR 53.3 billion had more than tripled from that in 2019.

British house price inflation according to the Halifax index slowed to a 6-month low of 5.2% in February.

Irish GDP contracted 5.1% last quarter, marking the third drop in four quarter and slashing the growth rate from a year earlier to 1.5% after printing at +8.7% in the third quarter.

Greek GDP advanced 2.7% last quarter after rising 3.1% in 3Q but was still 7.9% below the level in the final quarter of 2019.

Austrian GDP growth last quarter got revised to show a smaller drop of 2.7% versus 3Q and 5.7% compared to a year earlier. Austrian wholesale price inflation spiked from -0.1% in January to +2.2% last month.

CPI inflation in the Philippines climbed to a 26-month high of 4.7% last month. Core CPI was at 3.5%.

A feared second storming of the U.S. capitol didn’t happen yesterday. Senate debate over the pandemic relief bill remains pretty stalled on partisan grounds. Not clear exactly when a law will be signed, but it has to be very soon to avoid a discernible negative effect on economic news.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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