| Yesterday we discussed how the U.S. 10-year yield is having cascading effects throughout emerging markets (EM). Today, developed markets will be more in focus, primarily with Federal Reserve Chair Jay Powell appearing on a Wall Street Journal webinar at noon Eastern time today. This is billed as a “jobs summit,” and Chair Powell will surely use the slack in the labor market to justify the Fed’s dovish stance for years to come. He has plenty of data to back him up on that, with disappointing ADP jobs data today and today’s initial jobless claims of 745,000 — just nearly on the nose of expectations for 750,000.|
Markets will also be looking for how the Chair Powell will address those rising 10-year bond yields as well as short-term rates that are actually too low for the Fed’s comfort. Another version of “Operation Twist” is being bandied about a lot these days, with the Fed selling short term and buying long term to try to tweak the short end of the curve up and the long end down. Of course, the Fed storyline has been that the backup in the long end is due to economic growth, so why be concerned about it?
Taking this story out of the U.S. though, markets are taking note that the yield differential between U.S. rates and German bunds is widening. The same is true with U.S. yields and those of Japanese Government Bonds (JGBs). This has put a bid in the U.S. dollar index the last couple of days. Interestingly, this seems to be playing right through major currencies and settling in with those EM currencies we were discussing yesterday.
The other event of the day is an OPEC meeting today. Markets are expecting some increase in supply next month, but there are news reports out that are throwing cold water on that speculation. If true, it could mean that OPEC, and Saudi Arabia in particular, would hold back on supply to the market until it felt certain that a global economic recovery in a post-COVID-19 world really will occur. This would tend to keep oil prices elevated, which could feed into inflation expectations and into long-term bond yields, and the snowball would continue from there.
Finally, there is an interesting FX cross rate than tends to absorb all these factors — the Australian dollar (AUD) versus the Japanese yen (JPY). AUD is up over half a percent today. This pair can be seen in many different shades of market sentiment. Australia is a commodity-rich country, while Japan has to import most of its energy supplies. This is also a sign of risk sentiment, with the reopening expectation sending capital Australia’s way, as that is one place where the global supply chain starts. This then supports an evolving carry trade in which investors borrow in low-yielding JPY and fund AUD capital projects.
In any event, it will be another interesting day. Have a good one.
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