Federal Reserve Chairman Jerome Powell seems likely to indicate in his speech scheduled for March 4 that there is a possibility of a policy response from the U.S. central bank if rising long-term Treasury bond yields threaten the economic recovery, Standard Chartered bank estimates in a note cited by Bloomberg.
It might be unlikely Powell will mention options such as extending the period of securities purchases or Operation Twist, but it's a path the Fed could take if such action was needed. Powell's comments last week did not indicate concern about rising yields. Standard Chartered suspects, however, that last Thursday's moves, which saw the 10-year yield jump above 1.6 percent, may have worried the Fed and caught the attention of some policymakers.
Thus, it appears that Jerome Powell's speech may support a calming in the bond market and that the market is likely to conclude that 1.50-1.60 percent for the 10-year yield is the top of the Fed's comfort zone in the near term. However, a mere reiteration of the Fed's current guidance and its view that inflation will be transitory in the near term may carry the risk of rising yields.
In the currency market, the US Dollar appears to be continuing to strengthen against the Swiss Franc and the Japanese Yen. USD/JPY exceeded the level of 107.00, while USD/CHF approached 0.9200. These currency pairs have been forming a trend for several weeks now, and one of the main reasons may be the rapid increase in interest rates on US bonds. Thus, any mention and possible limitation of the increase in the market interest rates in the US may be a reason for a correction in these markets and a weaker US dollar in general.
In addition to the speech of the Fed Chairman, today's important event may be the decisions made during the OPEC meeting. Yesterday, market participants were surprised by the increase in US oil inventories. Last week it amounted to over 21.5 million barrels and was the highest in history. This may increase concerns about oversupply on the markets, which in turn may force OPEC+ to further cut production and postpone the deadline for lifting restrictions from March to April. Prior to the U.S. data, investors seemed to widely expect major oil producers to announce on Thursday that they would begin easing production cuts in April. That expectation may now be revised with the attitude that OPEC+ may not start increasing oil production until late spring. A barrel of WTI costs $61.7 this morning, while Brent costs $64.5.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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