U.S. Treasury Yield Climbs Sharply in Spite of Fed’s Message and Lifts Dollar

March 18, 2021

Markets aren’t buying yesterday’s dovish policy message from the Federal Reserve. The 10-year U.S. Treasury yield roared ten basis points higher overnight to 1.74%, just shy of doubling mid-December’s level. The 10-year British gilt yield rose 6 basis points even though the Bank of England maintained its policy settings, too, and called its current monetary policy stance appropriate. Continental European 10-year sovereign debt yields such as the German bund (+3 bps) have advanced somewhat more moderately, and the 10-year Japanese JGB yield is just a basis point higher.

Equity markets are mixed today. Those in New Zealand, India and Australia closed down 1.5%, 1.2% and 0.7%, but share prices proved resilient in Hong Kong (+1.3%), Japan (+1.0%), Indonesia (+1.1%) and Singapore (+0.9%). The German Dax  is up 0.9% so far, but the British Ftse has dipped 0.2%. The DJIA futures are flat, but the S&P 500 and Nasdaq point to lower openings.

West Texas Intermediate crude oil has fallen by a further 1.1% and below $64 per barrel. Gold is steady in spite of an appreciating dollar.

Overnight rises in the dollar amount to 0.7% against the Mexican peso, 0.6% relative to the Swiss franc, 0.5% vis-a-vis the kiwi, 0.4% against the euro and on a trade-weighted index, 0.3% versus the Aussie dollar, and 0.2% against the yen, loonie and sterling.

One currency to buck the downward trend of most currencies versus the dollar has been the Turkish lira, which has rebounded about 2% in response to a greater-than-expected 200 basis point increase in the Central Bank of Turkey’s one-week repo rate. Turkish CPI inflation has climbed to 15.6%. At 19%, the central bank interest rate is 10.75 percentage points above its 2020 low in June-August and at its highest point in a bit over a year and a half. An initial 200-basis point hike last September abruptly reversed a downward trend that saw cuts in each of the first five months of 2020 and totaling 375 basis points. A statement explaining today’s move says

The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability.

U.S. new jobless insurance claims increased 45k to 770k last week, the most in four weeks and easily surpassing analyst forecasts. The Philly Fed manufacturing index printed 3.4 points lower in February but at its third highest level during the past year.

Annual labor costs in Euroland accelerated to 3.0% last quarter from 1.6% in the third quarter and was also above the pace of 2.3% in the year ending in 4Q 2019. Euroland’s EUR 6.3 billion trade surplus in January represents a 9-month low but was greater than the year-earlier surplus of EUR 1.5 billion. In seasonally adjusted terms, the EUR 24.2 billion surplus fell by EUR 3.3 billion compared to December, as exports fell 2.9% and imports dropped by a lesser 1.3%. ECB President Lagarde indicated that steps to accelerate money growth announced at the recent policy review will not be implemented immediately.

Real GDP fell 1.0% in New Zealand last quarter but was only 0.9% beneath its year-earlier level. In all of 2020, New Zealand experienced a record GDP contraction of 2.9%.

Switzerland’s combined PPI/import price index was flat in February but posted the smallest year-on-year decline in 13 months. Import prices were 1.7% lower than in February 2020, while domestic producer prices declined by 0.9% on year. Separately, the Swiss trade surplus grew to CHF 6.85 billion in January-February from CHF 4.98 billion in the first two months of 2020.

Australia reported better February labor statistics than expected. The jobless rate fell 0.6 percentage points to an 11-month low of 5.8%, and employment climbed 88.7k to a 1-year high.

The aforementioned review of Turkish monetary policy that resulted in a two percentage point increase of the central bank interest rate was but one of six monetary reviews to report.

The Bank of England as expected left its Bank Rate at 0.1%. That decision and another to maintain existing asset purchase settings unchanged were each made unanimously. In 2020, the interest rate had been cut twice during March by a total of 65 basis points to its present level. A released statement today called present policy still appropriate in spite of somewhat faster global growth prospects and repeated that officials need to see significant evidence attesting to a rundown of plentiful current spare capacity before a tightening will be entertained. GDP is around 10% below its pre-pandemic level. British CPI inflation, now at just 0.7%, is projected to return near to its 2% target in the spring and to hover around that level through the coming three years.

Bank Indonesia’s key seven-day reverse repo rate has been maintained at 3.5%, its level since a 25-basis point cut done in November. In all, there were six such reductions during last year. A statement released by Indonesian monetary officials  projects that GDP should expand 4.3-5.3% this year with CPI inflation holding within the central bank’s 2-4% target range. The current account deficit is a manageable 1-2% of GDP in size, and the policy stance is expected to promote rupiah stability.

At the Bank of Norway, officials agreed unanimously to maintain their policy interest rate at zero percent, where it’s been since last May after three cuts totaling 150 basis points in 2020. In a statement, officials noted that the pace of Covid cases has lately been rising and that pandemic uncertainties remain a drag on growth. The krone’s appreciation and prospects for moderate wage growth suggest that currently above-target inflation will move down ahead. Officials want to guard against unemployment remaining very elevated for a prolonged period and then becoming entrenched. Hence, a stimulative monetary policy is warranted.

As in Turkey, monetary policymakers at the Central Bank of Brazil out-tightened market expectations. The Selic interest rate was raised by 75 basis points, not 50 bps as forecast, to 2.75% in the first hike of any sort since 2015. The rate had been cut five different times last year from February through August by a total of three percentage points. The rate hike announced late yesterday enjoyed unanimous support of the policy-making committee known as Copom. Officials characterized the rate hike as the start of “partial normalization  by reducing the extraordinary degree of monetary stimulus.  GDP ended 2020 growing strongly at the margin, recovering most of its first-semester decline, and inflation expectations rose above target at the relevant horizon for monetary policy. Additionally, inflation projections increased to levels close to the upper bound of the target for 2021.”

At the Central Bank of the Republic of Taiwan (China), which reviews monetary policy on a quarterly basis, the discount rate has been left unchanged at 1.125%. There had been one cut during 2020, a move of 25 basis points. According to a statement, the present stance is justified by the persistence of numerous global and regional uncertainties.

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

Tags: , , , , , ,


Comments are closed.