Awaiting Today’s Fed Forecasts and Powell’s Press Conference

March 17, 2021

Against the backdrop of a significantly improved U.S. economic growth outlook this year and rising U.S. and global inflation lately, the 10-year U.S. Treasury yield  climbed from 0.89% in mid-December to 1.01% when the FOMC last met to a 13-month high of 1.67% today, the second scheduled FOMC meeting of 2021 figures to be the most significant one in quite some time. Comments by Fed officials led by Chairman Powell have downplayed the likely impact on monetary policy, but financial markets aren’t believing the baseline scenario outlined in the committee’s forward guidance that an initial hike of the federal funds rate is unlikely before late 2023. They will be watching two things in particular today: 1) revisions in the Fed’s growth, inflation, unemployment, and interest rate forecasts and 2) what Chairman Powell explicitly has to say about the bond market sell-off.

In overnight market action, the dollar rose 0.4% against the Aussie dollar and Swiss franc, 0.2% relative to the yen and loonie, and 0.1% versus the euro and on a trade-weighted basis, but it is unchanged relative to the Chinese yuan and pound sterling.

The 10-year Treasury yield is six basis points firmer today, followed by gains of 5 bps in the British gilt yield, 3 bps in the French and German 10-year sovereign debt yields and one basis point in the Japanese JGB yield.

Equities fell 0.6% overnight in South Korea and Taiwan, 0.5% in Australia and Indonesia, but unchanged in Japan, Hong Kong and China. European share prices are mostly down. So are Nasdaq futures, but the DOW and S&P futures are respectively flat and up slightly.

Oil and gold prices have declined 0.7% and 0.2%.

News this morning that U.S. housing starts and building permits recorded robust monthly declines in February of 10.3% and 10.8% followed yesterday’s reports of drops that month of 3.0% in retail sales and 2.2% in industrial production. Harsh weather in February depressed many sectors of activity. More recently, mortgage applications in the United States posted weekly declines of 1.3% in the week of March 5th followed by 2.2% in the ensuing week.

Japan’s seasonally non-adjusted customs trade surplus in February of JPY 217 billion was just half as much as anticipated because of an unexpected 4.5% on-year drop in exports. The seasonally adjusted trade balance swung into deficit for the first time since last June. The gap was JPY 39 billion on such a basis after surpluses of JPY 551 billion in January, JPY 719 billion in December and JPY 615 billion in November.

The second estimate of consumer price inflation in Euroland for February confirmed the preliminary 0.9% estimate and matched January’s 11-month high. Core inflation of 1.1% was likewise unrevised and similar to the year-earlier pace of 1.2%. Energy prices went up 0.9% versus January’s level, while all other components of the CPI posted a tame monthly rise of 0.1%.

Construction output in the euro area climbed 0.8% in January but was 1.9% weaker than its year-earlier level. Car sales in Euroland posted back-to-back plunges of 24.0% and 19.3% in January and February compared to their year-earlier levels.

Greek unemployment in December of 15.8% was down from a crest of 17.8% last June and the lowest since 15.4% in February 2020 just before the pandemic. Spain experienced its smallest trade surplus in January since April 2020.

Australia’s index of leading economic indicators compiled by Westpac was unchanged  in February after a mere 0.1% uptick in January. Assistant Governor Kent of the Reserve Bank of Australia said monetary policy shouldn’t try to control asset prices. Such isn’t accurately possible.

Austrian CPI inflation in February returned to December’s 1.2% rate after dipping to an 8-month low of 0.8% in January. A 2.0% on-year decline in Portuguese producer prices in February was the smallest 12-month drop in a year. Producer prices had fallen as much as 6.6% last May compared to the same month a year earlier.

Canadian consumer prices rose 0.5% in February, 0.4 percentage points of which was due to typical seasonality bias. Although up from 0.1% in August, year-on-year inflation of 1.1% last month was just half its level in February 2020. Gasoline and food were the main inflation drivers, and excluding food and energy, consumer prices last month rose just 0.2% on month and 0.8% on year.

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

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