Mar 14, 2021 AT 05:54PM
Financial markets focus will shift to the US and UK over the coming week, as rate-setters in both jurisdictions meet to decide on policy, on Wednesday and Thursday, respectively. After a stunning selloff in US Treasuries which took benchmark 10-year yields above 1.6%, the highest in a year, the March 16-17 Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation and whether the Fed will decide to act on FI turbulence and prolong the Supplementary Leverage Ratio (SLR) relief beyond 31 Mar despite more and more Democrats voicing their concerns about doing so. As Nordea flagged, a non-prolongation scenario could lead to pent-up sales of as much as USD 700bn worth of US Treasuries. Other than fed, it’s a busy calendar of central bank meetings with BoE, BoJ and Norges Bank are all due next week. Last week, the BOC left monetary policy unchanged, however the ECB is feeling the pressure of rising yields and inflation expectations and said they will increase the pace of bond purchases significantly. Neither the Fed nor the BOE are expected to announce any policy changes but remarks from policymakers will be carefully parsed for any guidance regarding how the recent rise in government bond yields might, or may not, be influencing their thinking. Elsewhere, The US also has some key data points this week, notably industrial production, and retail sales.
1) FOMC (Wednesday)
The Federal Reserve will be meeting for the first time since yields exploded higher and the Biden stimulus bill became law. It’s FOMC week and the world will be watching what the Fed’s response will be to the spiked volatility in bond markets that’s upset tech stocks and revived the US dollar. What to watch?, As per ING - We’ll get to see a new set of quarterly projections, where 2021 GDP will likely be revised higher from the 4.2% median in December. There will also be a lot of interest in the Fed Funds rate Dot Plots. Does the Fed 2023 Dot Plot median shift to a 25bp hike? Probably not, but the dollar would probably rally if it did. Treasuries, there is huge focus on whether the Fed extends its US Treasury exemption from the SLR – due to expire at the end of the month. Failing to extend it would be a big surprise, hit Treasuries and also hit equities on the view that US banks would have to raise more equity capital.
Per Nordea - An operation Twist could be one way of mitigating the potential downside pressure on longer bonds from re-installing the SLR regulation, but we still find such action unlikely against the backdrop of increasing inflation. Should the Fed decide to move towards a WAM of 10yrs in the SOMA portfolio again, it could work to temporarily dampen the steepening pressure in the USD curve, but it may not work as well as in 2011-2012 as the business cycle is gaining momentum, which usually leads to higher bond yields, not lower. Mind the gap between the Global PMI and 10yr bond yields? We target 2% in the 10yr Treasury already towards summer.
2) BOE (Thursday)
Thursday brings central bank meetings in Britain and Norway. The BoE is not seen unveiling additional policy easing despite concerns over the recent spike in borrowing costs. Instead, any action such as upping the BoE’s bond-buying firepower is likely to come later in the year - perhaps in May, when the next set of economic forecasts emerge. The BoE should keep its constructive outlook in place, with the fast pace of vaccination (and the pace is poised to double from the next week onwards) supporting the optimistic outlook for the economic recovery.
3) NORGES BANK (Thursday)
In Norway, there is a clear scope for a hawkish revision of the outlook not least due to higher oil prices. At the rate meeting next week, Nordea expect Norges Bank to signal a first rate hike in December this year, with the probability that it’ll come as soon as September. Moreover, you should expect a higher rate path throughout the forecast period, mostly driven by oil prices but also by the vaccine roll-out. (Nordea)
ING on Norges Bank
The possible hawkish bias of the Norges Bank (NB) meeting next Thursday is likely to be another tailwind for NOK. Rising CPI, higher oil prices and optimistic prospects for the vaccination suggest further upward revision to the interest rate path – both in terms of bringing the timing of the first rate hike forward and raise the interest path across the forecast horizon. The upgrade to the interest rate path is likely to push EUR/NOK lower, with the psychological EUR/NOK 10.00 level likely to be seriously tested next week.
4) BOJ (Friday)
The Bank of Japan will present the review of its policy tools on Mar 18-19, which may carry important spillovers to global markets. The BOJ has tried to persuade markets that the review only aims at increasing the bank’s flexibility to counter potential new shocks, but bond markets have tested the yield-curve-control regime recently, with the 10yr bond yield trading above 15 bps just a few weeks back. The BOJ’s setup has become terribly “pro-cyclical” since it buys more bonds, when growth and bond yields are rebounding in tandem, while it buys less bonds when growth disappoints. Could the target be changed to get rid of the procyclicality? A lot is at stake and the BOJ will likely insert clearer guidance in its statement on what it sees as an acceptable level of fluctuation in long-term interest rates, according to sources -- a sign it won’t tolerate rises that hurt the economy. Given a nascent economic recovery, the BOJ may even suggest scope for more negative short-term rates. In the midst of this, financial year-end flows back into yen are accelerating. A currency rally will add to the BOJ’s headaches.
5) EM CB meetings (Brazil and Turkey)
In EM, meanwhile, the only way for interest rates to go may be up. That’s the message we might hear from several central banks over coming days. Central banks in Brazil and Turkey -- meeting on Wednesday and Thursday respectively -- are most likely to raise rates. Markets will also find out on Thursday if Indonesia’s rate-cutting cycle has come to an end. Most have faced rising inflation pressures for some time but now they are also confronted by higher U.S. Treasury yields, which raise borrowing costs for everyone. For oil importers, Brent crude prices above $70 is an added problem -- all this while economies are still reeling from the coronavirus impact.
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Source: Nordea, Reuters, FT, ING, DailyFX and FXStreet
This report has been prepared by consolidating the data from various sources mentioned below with respective links.
https://corporate.nordea.com/article/64074/week-ahead-on-why-long-bond-yields-increase-during-qe
https://www.reuters.com/article/idUSKBN2B41C2
https://www.ft.com/content/a5428953-7740-47d1-b683-d19ecd226658
https://think.ing.com/articles/g10-fx-week-ahead-12032021
