Treasury yields dip as jobs data remains in focus


CNBC 31 August, 2021 - 06:24am 16 views

What does tapering mean Fed?

Tapering is the reduction of the rate at which a central bank accumulates new assets on its balance sheet under a policy of QE. Tapering is the first step in the process of either winding down—or completely withdrawing from—a monetary stimulus program that has already been executed. InvestopediaTapering Definition

Jefferies' Darby on Fed, Markets, China Crackdown

Bloomberg Markets and Finance 31 August, 2021 - 08:30am

Bonds yields moved mildly lower on Monday as investors look ahead to Friday's all-important jobs report.

The yield on the benchmark 10-year Treasury note ticked down 3 basis points to 1.282% in afternoon trading while the yield on the 30-year Treasury bond slipped 2 basis points to 1.896%. Yields move inversely to prices and 1 basis point is equal to 0.01%.

The labor market is in focus ahead of the August jobs report which will play a major part in determining when and how the Federal Reserve will start unwinding its bond program.

Economists polled by Dow Jones expect 750,000 jobs were created in August and the unemployment rate fell to 5.2%.

Fed Chairman Jerome Powell last Friday acknowledged that the central bank aims to taper its $120 billion a month bond-buying program this year, but stressed the need for more robust employment data before any further decisions would be made.

The 10-year Treasury yield has traded choppily in recent weeks but generally been moving upward. The benchmark yield is still trading well below its highs from earlier this year.

"The 10-year yield continues to build upside momentum, and Powell's dovish tone on Friday won't derail that momentum. However, the 10-year yield needs to break through resistance at 1.36% and then at 1.41% before it can mount a test of the April downtrend," Tom Essaye of the Sevens Report said in a note on Monday.

Investors will be watching for further data in the coming week, including consumer confidence Tuesday and Wednesday's release of Institute for Supply Management manufacturing data and ADP's private sector payroll data, seen as a sort of preview for Friday's government jobs report.

U.S. stock futures were steady in overnight trading on Sunday, though it's expected that U.S. stocks could stay range-bound until the release of August's jobs report.

Last week, the S&P 500 and the Nasdaq Composite closed at all-time highs on Friday amid investor relief after Powell's signaling that bond tapering would start this year. Still, the central bank appears in no rush to hike interest rates. 

Auctions for U.S. 3-month and 6-month Treasury bills were held on Monday. Consumer confidence data for August is set to be published Tuesday, along with the Chicago purchasing manager's index and house price indexes for June.

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Is the Fed Ever Going to Taper? Can They?

RealMoney 31 August, 2021 - 08:30am

The infamous Jackson Hole this past Friday has officially sealed the end of summer holidays and lack of trading liquidity, thanks to Fed Chair Powell reassuring the market just what it needed. The words "still a significant amount of work needs to be done to reach our goals" was all the market needed to see it trade back higher, unwinding the weakness going into the meeting.

Starting this year the market and each sell side house had been pushing the reflation/reopening trade, as seen by their multiple upgrades following the Q4 rally. However, over the past quarter, this reflation trade has almost unwound as we saw iron ore fall 40%, copper down 15%, and oil down 10%, to name a few. The big debate going into Jackson Hole was whether the Fed would announce a tapering decision sooner or later.

One of the Fed's main objectives is to reach full employment pre-COVID levels and will keep their foot on the pedal till they achieve that goal. Even though they have taken their inflation assessment higher, they maintain that it is transient and will soon moderate over the course of the year. They have to say that as they honestly do not know, they only wish.

The problem is that the Fed has made this liquidity bubble so big now post the Global Financial Crisis, that it has become too big to fail. Given the amount of global dollar denominated debt, they cannot let rates rise too much lest they and other governments default on their loans. The only other problem in this modern monetary theory is that rates are now close to 0 and even negative, and they have no room to cut if something were to go wrong now. Every time they try to raise rates or ease back QE, the markets throw a tantrum and financial assets collapse, which is linked to the overall net asset value and wealth of all Americans and consumer spending.

The U.S. central bank's balance sheet is above $8 trillion, and over the past few months we've seen signs of U.S. growth plateauing after the rushed reopening trade of 1H. All that money thrown at the system and now it is still showing signs of slowing down, and one can only wonder how much the Fed will print at the next problem. That can keeps getting kicked further down the road.

The market has unwound most of the long reflation trade as commodity prices, especially those exposed to China, have taken a big hit post the Chinese deleveraging, despite their fundamentally tight inventory balances. That is why macro is so important for commodities as well as micro. When China sneezes, the whole world catches a cold. This could not be closer to the truth, literally and figuratively.

Going into the Jackson Hole meeting, the market was more deflationary than inflationary. One needs to remember the Fed's role is a reactionary one, they only react to emergencies, they do not pre-empt. Chairpersons like Volcker are a rare breed of the past. Since Greenspan, every Fed official has followed the "Greenspan put" model, as they have not been paid to do so otherwise. It has not failed, so why change it.

Inflation is a lot stickier than the Fed expects, but the fact that producer prices have stalled a bit here buys them room to keep their QE going given the Delta variant and potentially more closures, and job payroll growth still lagging. And that is what they did on Friday, tilting in a slightly dovish tone set the markets on fire pushing up the price of copper, oil, and all inflation related assets. It's Sod's law and this is happening at a time when houses like UBS (UBS) are now downgrading cyclicals and upgrading healthcare, after a 20%+ unwind - such value add analysis.

Now we wait for the Friday job payroll numbers. Once full employment is reached, then it will be a much more difficult question to ask, and the Fed might need to tackle that by Q4. Will it be another rehash of December 2018? Time will tell. Given the change in global supply chains and massive money printing, inflation is not about to ease any time soon. There has been a distinct change in global supply chains, witnessed in container shipping rates and the price of food and consumer goods across the board. Inflation is not a myth it is very much live and real.

For now, Powell has given no firm time table, just saying it would be open to tapering later this year. To put things in perspective, tapering may just mean scaling back a few billion in MBS or Treasury assets, not reducing the balance sheet as such. For now, it remains a guessing game. So until then, enjoy the free ride.

At the time of publication, Maleeha Bengali had no position in the securities mentioned.

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As Fed preps for tapering, expect more volatility in Asia

The Manila Times 31 August, 2021 - 08:30am

ON Friday, Jay Powell suggested that the US central bank had met one of the two goals it had sought to achieve before reducing its monthly $120-billion asset purchase program.

In the closely watched speech at the Jackson Hole conference, the Fed chairman said the "'substantial further progress' test has been met for inflation. There has also been clear progress toward maximum employment."

The majority of the Fed officials believe it is appropriate to start "tapering" the bond-buying program in the fall.

In effect, the Fed cannot avoid tapering.

Instead of responding to the World Health Organization's (WHO) coronavirus warnings in January 2020, the Fed, like the Trump White House, took its time. It awoke only after the WHO's declaration of the global pandemic two months later.

On March 20, 2020, the Fed slashed its short-term benchmark interest rate to near zero. To provide additional stimulus, it began purchasing $120 billion monthly in Treasury and mortgage securities.

While US headline and core inflation are currently above 5 percent, significantly higher than the Fed's 2-percent inflation target, a recent jobs report suggests the recovery is broadening. Yet, the big picture is mixed.

While Powell was speaking, the White House more than doubled its forecast for annual inflation in new projections as supply-chain disruptions continue to put upward pressure on prices due to the pandemic and the Delta variant.

The consumer price index is now expected to steady at 2.5 percent in fall 2022. Yet, critics believe the Fed is stoking still another real estate price bubble that threatens to wipe out home equity.

The cold reality is that the longer the Fed maintains its excessively loose monetary policy, the more it is generating excess liquidity, which is fostering inflation. That is likely to prove costly in the future. Over a decade of ultra-loose fiscal and monetary policies have put the global economy on track for a slow-motion train wreck.

Officially, the Fed's dual mandate is to focus on price stability and full employment. International implications remain a secondary consideration.

What is the strategy of the People's Bank of China (PBOC) toward the Fed's tapering? The simple answer: In the short term, cautiously accommodative. In the medium term, cautiously neutral. If warranted, PBOC is likely to inject liquidity to avoid tightening of monetary conditions.

Unlike the major economies in the West, China has largely contained the novel coronavirus and is rebounding ahead of other major economies.

In contrast, Japan faces extraordinary challenges. Ex-premier Shinzō Abe's structural reforms proved inadequate despite huge fiscal stimulus packages, ultra-low rates and rounds of quantitative easing. Secular challenges have been coupled with the Covid-19 surge.

Amid the rising political discontent, Premier Suga is battling for his political future. Inflation remains close to 0 percent with interest rate at minus 0.1 percent. The maneuverability of the Bank of Japan is limited. Sovereign debt is close to 270 percent of gross domestic product (GDP) and rising.

Two days before Powell's speech, the Bank of Korea raised its interest to 0.75 percent as the first developed economy to do so in the pandemic era. It was necessitated by financial risks pressuring the economy including heated house prices and rising household debt.

The move is not likely to be followed by Asia's other central banks.

Instead of the much-anticipated recovery, Southeast Asia is struggling with the Delta variant and vaccine inequality, which have resulted in slower vaccination rollouts. Hence, the lowered GDP forecasts across the region.

With policy rates at a historical low, Southeast Asia will soon have to cope with the Fed's impending rate hikes. Since early spring 2020, all regional economies have been busy cutting their rates.

While the rates have almost halved in both Vietnam (interest rate 4.00) and Indonesia (3.50), their central banks continue to have adequate policy space. In turn, the central banks of the Philippines (2.00) and Malaysia (1.75) still have significant space available. By contrast, Thailand's (0.25) options are now more limited.

Foreign-exchange fluctuations reflect the new realities. Before the pandemic, the Thai baht was still the strongest-performing regional currency. But it has plunged more than -10 against the US dollar.

The Malaysian ringgit and the Philippine peso (about -4 percent) remain somewhat exposed, whereas the Singapore dollar and Indonesian rupiah (about -2 percent) are better positioned. The Vietnamese dong has actually appreciated (+1 percent) relative to the US dollar, thanks to foreign-exchange truce with Washington.

Even today, the US economy, central bank and dollar serve as the yardsticks for international performance. Yet, the Biden administration's multitrillion-dollar infrastructure investment initiatives ignore the country's dire fundamentals.

US sovereign debt is close to 135 percent of GDP and climbing ever faster. Persistent budget deficits will cause the federal debt to double over the next three decades.

In the past four decades, the strength of the greenback as measured by the US dollar index has progressively weakened despite the Fed's hikes. After Paul Volcker's massive rate hikes in the early 1980s, the index peaked at 160. In the early 2000s, it was barely 120. In the past year, it has lingered around 89 to 95 (see figure).

Unsurprisingly, Powell's comments on Friday penalized the dollar index by 0.4 percent. It was down 0.9 percent for the week; the sharpest decline since early May. As global growth prospects are fueled by large emerging economies, the global economy is being held hostage by a graying, excessively indebted single currency.

For some time, data by the International Monetary Fund has suggested that the dollar may be losing its draw as a reserve currency. The longstanding debate on the US dollar as the world's reserve currency will intensify in the coming months. Perhaps, it made sense in 1945 when the US economy still accounted for half of the global economy. But today, those days of wine and roses are way gone.

We are navigating in uncharted waters with few lifeboats, all of which are leaking.

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