This article was originally published by the Market Pulse.
Given where the COVID-vaccine/stimulus driven economy currently stands, Fed Chair Powell decided that now was not the time to push back over the recent developments in the bond market. Powell reaffirmed the Fed’s dovish commitment until the economy recovers, but that was not good enough for risky assets. Wall Street quickly realized that the bond market selloff can continue since there will not be making any “Operation Twist” announcements until disorderly conditions or persistent tightening in financial conditions derail the economic recovery. The Fed probably won’t signal action unless the Nasdaq falls into bear market territory or if the 10-year Treasury yield rallies above 1.70%.
Powell did not assuage concerns over surging bond yields and that gave financial markets permission to sell out of technology stocks and keep the bond market selloff going, which sent yields higher alongside the dollar.
Overall, Powell’s comments were consistent with what he has said in the past. He reiterated the Fed is committed to achieving their maximum employment and price stability goals. Adding that they still remain a long way from its goals, which even if they return to pre-pandemic levels is still short of what they want to achieve.
The Fed will eventually have to address the problems at both the short and long end of the curve, but that might not happen until the 10-year yield rallies another 15 basis points higher. Calls for Operation Twist, or the Fed’s maturity extension program will grow over the coming weeks. Operation twist sells short dated securities and buys long-dated securities in a reserve neutral way. This would help alleviate negative concerns at the front end and skyrocketing moves at the back end.
US stocks got battered with the S&P 500 index giving up all this year’s gains, while the Nasdaq fell into correction territory. Asia will have a rough open and could struggle to attract buyers as market participants view the US nonfarm payroll as the next major event. Financial markets won’t be rushing to buy more stocks unless softer economic data shows the recovery needs more support.
The dollar got its crown after Fed Chair Powell disappointed investors in signaling what they will do if the bond market volatility remains elevated. The dollar rally will remain as long as Treasury yields continue to rise. The US dollar and Canadian currency are the standouts today given the aftermath to both the OPEC+ meeting and Powell’s comment.
Crude prices rallied after OPEC+ stunned energy markets with the incredibly bullish decision to keep output unchanged. Expectations were high for the Saudis to end their voluntary 1 million bpd cut and for the group to collectively raise output by 500,000 barrels. No one will want to step in the way of the Saudis, but this decision to extend their million barrel per day cut leaves them vulnerable to losing market share next month when the oil market is in deficit by a couple million barrels.
Oil prices could rip higher now that a tight market is likely up through the summer. WTI Crude at $75 no longer seem outlandish and Brent could easily top $80 by the summer.
Gold is bringing a knife to this bond market fight. Gold is still vulnerable to further pain after Fed Chair Powell didn’t push back with the recent surge in Treasury yields. It seems Treasuries can go a lot higher and that’s trouble for the gold market. It seems gold still remains dependent on the stimulus trade from the Fed and that won’t trigger fresh actions unless financial conditions tighten, or disorderly market conditions emerge.
Gold could easily drop another $50 over the next week if the bond market selloff continues and the dollar continues to rally. Once the gold market is convinced the Fed will push back and consider more action, perhaps Operation Twist, the other fundamentals that include improving central bank demand and a better outlook for jewelry purchases should support a strong rebound.
Bitcoin was another victim of Fed Chair Powell’s hesitancy to push back over rising Treasury yields. Bitcoin’s fundamentals remain as robust as ever, but it still might be vulnerable in the short-term if the stock market slide continues over the next week. Panic selling will likely force many institutional investors to unwind crypto bets and pile into the move in Treasuries.