Nervy markets in Asia weakened yesterday ahead of the Fed meeting statement and media conference for chair Jay Powell, as well as his updated forecasts.
Just why they were nervous is easy to understand – investors continue to believe the tales from some in the markets that the Fed will tighten monetary policy sooner than planned – ignoring comments to the contrary from chair Jay Powell.
MSCI’s Asian markets index (excluding Japan) were easier yesterday ahead of the meeting, led by declines in South Korea’s KOSPI (down 1%) and Australia’s ASX 200 (down 0.47%).
Hong Kong’s Hang Seng fell 0.05%. Shanghai was off slightly and Japan’s Nikkei 225 eased 0.02%.
Markets have bounced around (at times showing ’taper tantrum’- like volatility) in recent weeks by a slide in US Treasury bonds that saw the benchmark yield jump to a more than one-year high above 1.64% last Friday as silly bond investors reckoned that accelerating COVID-19 vaccinations and President Biden’s massive $US1.9 trillion stimulus package, would spur faster-than-expected growth and inflation in the world’s biggest economy.
It will on both counts – especially prices in the June quarter when headline inflation will rise sharply because of the big falls a year again the pandemic-driven lockdowns.
The bond bunnies know this, but are fermenting rising market volatility to try and trade and generate profits of the size seen in equities and commodity markets.
Inflation will ease later in the year as the spare capacity in the US economy (despite the stimulus spending) continues to hold back jobs growth.
Bonds (and currencies, such as the Aussie dollar) have seen speculation the Fed may be forced into a technical adjustment to the levers controlling its policy rate.
But few economists see the US central bank doing anything at this week’s meeting, even if it releases rosier growth forecasts, as it is expected to do.
“We expect (Chair Jerome) Powell to note the FOMC has the tools to intervene if the bond market becomes disorderly or constrains the economic recovery,” analysts of Commonwealth Bank of Australia wrote on Wednesday.
“But we expect Powell to push back against talk of policy tightening because of the large amount of labour market slack.”
“U.S. bond yields and the USD could jump if the FOMC’s post‑meeting statement and Powell’s statement are not deemed dovish enough.”
Benchmark 10-year Treasury yields traded around 1.6%, at 1.6197% on Wednesday in Asia.
The bond bunnies continue to ignore Mr Powell’s most recent comments earlier this month in New York when he made clear the central bank will be sitting and waiting.
The Fed chair confirmed his thinking earlier this month in a speech to a New York investment conference.
Powell said that with vaccines rolling out and the government fiscal taps open “there is good reason to think we will make more progress soon” toward the Fed’s goals of maximum employment and 2% sustained inflation.
But “even if that happens it will take substantial time…We want labor markets consistent with our assessment of maximum employment. That means all of the things,” Powell said in reference to hopes for not only a low unemployment rate but wage and job gains that flow to minorities and others often left out of the first stages of an economic rebound.
“I want to be clear about this,” Powell said. Even when conditions do improve, “I expect that we will be patient.”
