Mizuho Daily – Reflation Without Reservations?

Mizuho daily insights by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

Reflation Without Reservations?

Reflation trades came roaring back, with UST bond yields rebounding, equities rallying 1.0%-1.4% and commodities on a bullish rampage; on the back of Powell’s second day of testimony to the Congress (this time to the House Financial Services Panel). Same man, same message … so what was the difference? Probably a chance for markets to fully digest Powell’s details on the Fed’s commitment to prolonged monetary policy stimulus. Two dimensions of emphasis in particular opened the door to reflation without reservations.

First, was Powell’s quantifiable elucidation of the timeline for “substantial further progress” suggesting that it “could take more than three years to hit the average 2% inflation target”. Arguably, the “Dot Plot” in December had indirectly revealed this as well. But to hear this from the horse’s mouth in the context of the expected $1.9trln fiscal stimulus assuaged concerns that inflation risks in the near-term could abruptly stop the music.

Second, the Fed also downplayed fears that “asset prices … elevated by some measures” will prompt policy normalization; assuring that this “doesn’t necessarily lead to inflation” other than a one-off impact on prices, which the Fed is inclined to look through. In other words, a reiteration of flexible average inflation targetting (FAIT) being unfazed by near-term, intial rise in commodity and (some) asset prices,;’ to stick to a prolonged policy accommodation means that the plug on reflation effects has not been pulled.

Against this backdrop, oil prices have surged (with Brent at $67 and WTI above $63), Copper is holding well above $9,200. UST (10Y) yields tested 1.4% albeit settling just below. Despite higher UST yields though, the Greenback was on the back foot, deferring to “risk on” triggered by Powell (perhaps hinged on prolonged accommodation). But gains against a weaker dollar were far from even, being led by commodity currencies. NZD led (1.3% up), with RUB (+1.1%), NOK (+1.0%) and AUD (+0.7%) claiming priority on the leader board.AUD clearing mid-0.79 puts 80 cents on the radar, EUR though may still hesitate ahead of 1.22 break while USD/SGD declines are limited by USD/JPY bump up to 106 on “risk on” and yields.

BoK: Unwavering Dovish Slant

As expected, the BoK kept its policy rate unchanged at current historical lows of 0.50%. What’s also unchanged is the BoK’s unwavering dovish slant despite the non-action on rates as the BoK keeps the surveillance on bond yields and watches for credit market soft spots. Admittedly, rising prices of agricultural products and global oil have been highlighted as causes for concern, according to recent statements by the First Vice Finance Minister. But this is a policy inconvenience, not priority. Instead, more appropriate supply-side policy response may be on the table if these price surges continue unabated.

Whereas a weak job market (with unemployment jumping to 0.9%-pts to 5.4%) and highly uneven recovery are overriding concerns; leaving the BoK firmly in growth-propulsion mode. That said, the BoK will defer to fiscal policy, capable of far more targeted/effective measures, to tackle healthcare and the economy. To that end, the BoK Governor (following a joint meeting with the FM) confirmed that the central bank will maintain an accommodative stance and; extend financial support including allowing banks to roll over principal and interest payments for small businesses and self-employed individuals. Simultaneously, it will be interesting to see how the BoK assesses and responds to the on-going, sharp pick up in yields across the curve following the rise in UST yields.

Source: Mizuho Bank Ltd