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By Edward Moya, Senior Market Analyst, New York, OANDA,
US stocks slumped after Treasury Secretary Yellen and Fed Chair Powell made an uneventful first joint appearance to the US House Committee on Financial Services. Fed Chair Powell reiterated his optimism that the $1.9 trillion pandemic relief bill will not lead to an undesirable increase in inflation, adding that the Fed has tools to address any sustained pricing pressures. Yellen reminded lawmakers that “very deep pockets of pain” are in the data. She did not give any details on the proposed sustainable infrastructure spending plan.
The dovish duo defended their current stances on the economy and what else is needed to support the recovery. It seems infrastructure spending could happen after most of the COVID lost jobs have returned. Higher taxes will be needed to pay for infrastructure spending, so that probably means Republican support will be extremely difficult. The cyclical rotation trade did not have any reasons to become optimistic given the current path for infrastructure spending. The Russell 2000 led the declines while the S&P 500 index only posted a small loss.
US Data
The Richmond Fed manufacturing index and Philadelphia Fed Non-Manufacturing Index showed that manufacturing activity is healthy, while the service sector is becoming very optimistic. The Richmond Fed Manufacturing survey gives good reason to remain optimistic with manufacturing activity.
The Philly Fed factory index surged to its highest level in nearly 50 years, which was mainly because the timing of the survey occurred when the $1.9 trillion American Rescue Plan got finalized.
Optimism for the US economy remains strong following the Empire State, Philly Fed and Richmond indexes.
New home sales dropped to a nine-month low as the deep freeze that hit the South disrupted sales. The housing market is slowly moving away from its peak. As the US moves closer to returning to pre-pandemic life, the mass exodus from big cities will slow down. Skyrocketing mortgage costs will eventually be a negative for the housing market, but right now it could incentivize some first-time buyers to lock in a mortgage. Home sales may struggle for a couple of months, but optimism is still high for it to be strong heading into the summer.
The dollar is rallying on US growth exceptionalism, but mostly because of Europe’s worrying vaccine rollout and virus trends.
US Treasury Auction
The $60 billion 2-year Treasury auction had robust direct demand. The two-year notes bid-to-cover was 2.54, an improvement from the 2.44 seen with the prior auction. The yield on the 2-year Treasury yield was unchanged at 0.147%, while the 10-year yield fell 5.3 bps to 1.642%.
BOC
The Canadian dollar surged after the Bank of Canada gave the all-clear sign to ending its emergency liquidity programs on May 10th. Liquidity is healthy and the economy is headed in the right direction. The next step is to scale back asset purchases and that should signal policymakers are very confident with the current trajectory of the economy.
Oil
Oil prices are declining as market structures flip to contango, the dollar resumes despite falling bond yields, and a dreary European short-term crude demand outlook. Brent’s prompt spread is in contango as oversupply fears return due to lackluster demand. The bumpy reopening process in Europe is raising concerns that they might not have a normal summer. Lockdown extensions are crippling near-term demand forecasts and that could keep crude prices heavy a little while longer.
WTI crude weakness could target the mid-$50s, but a sustained move below $50 seems unlikely. Europe should see lockdowns thwart the current COVID wave and vaccine rollouts will improve over the next couple of months.
Gold
Gold prices are modestly softer despite a much stronger dollar. The global economic recovery is hitting a few big road bumps and that is driving some safe-haven flows into gold. Gold had a limited reaction from Fed Chair Powell and Treasury Secretary Yellen’s joint testimony on Capitol Hill. The dovish duo reaffirmed their assessment on the economy and the amount of support that is still required for the recovery.
Gold is struggling for direction right now and a continued consolidation might be the trade for now. Investors waiting for a make-or-break moment in the bond market might have to wait until Thursday’s seven-year notes auction. Gold might be stuck between $1700 and $1750 until we get past that key auction.
Bitcoin
Bitcoin rose despite Fed Chair Powell’s reaffirmation of the tough stance that a digital currency can’t remain private-only. Regulatory fears for cryptocurrencies are not going away anytime soon, but for now seem like a distant risk.
