This week is considered to be perhaps the most important week of March, with all kinds of risks coming together. Three major global central bank interest rate resolutions are on the horizon, with particular attention to US bond yield movements around the Fed resolution.
The first reminder, since last Sunday (March 14), the United States and Canada have entered daylight saving Time, so the market opening and closing time of these two countries and the release of economic data will be one hour earlier than before. March 15 (Monday) onwards, Gold and silver, U.S. oil will open earlier at 6:00 GMT, U.S. stocks will open at 21:30 GMT. U.S. EIA Crude Oil inventory data will be released at 22:30 on March 17 (Wednesday), the Federal Reserve interest rate resolution will be released at 02:00 on March 18 (Thursday), and European Daylight Saving Time will start on Sunday, March 28.
① Global eyes on the Fed, how high will the U.S. bond yields rise again?
On Thursday (March 18) at 02:00 am, the Federal Reserve FOMC will announce its interest rate resolution, policy statement and economic expectations, and Fed Chairman Jerome Powell will hold a press conference.
Prior to this, the first few trading days of the week, the U.S. bond market and the risk assets directly affected by it are still likely to continue to shake in the silence of the Fed.
In addition, at the moment can not rule out further upward “test” of U.S. bond rates can make Powell “worried” about the bottom line, while the ECB took the lead in accelerating bond purchases, the Fed also needs to respond to this key topic. Kit Juckes, global macro strategist at Societe Generale, believes there will be no peace in the market until the 10-year U.S. bond yield reaches 2%.
Some investors are already betting that the Fed will raise rates multiple times. Barclays analysis shows that in the swaps market, there are already positions betting that the Fed will raise interest rates seven to eight times by March 2025. Reflecting the market’s future direction of the Fed’s 5-year U.S. bond yields continue to climb close to 2-year highs.
Against this backdrop, investors are paying close attention to the Fed’s statement this week and in particular will be watching closely for the following.
The Fed’s views on the rise in bond yields.
Whether it will adopt “Operation Twist”.
Whether the excess reserve rate will be raised.
The Fed’s position on easing the duration of the Supplemental Leverage Ratio (SLR); (The Fed’s policy of loosening the SLR for banks expires at the end of March, and brokers sold U.S. bonds aggressively last week because of uncertainty about whether the loosening could be extended. (For the week ended March 3, primary brokerage positions in U.S. Treasuries fell to $185.8 billion, down $64.7 billion from the previous week on a year-over-year basis and the highest single-week decline on record.)
The latest economic growth and Inflation expectations and Powell’s latest comments.
Some market analysis suggests that the Fed may use the March monetary policy meeting to signal a crackdown on long-term U.S. bond yields.
Credit Agricole believes that while the FOMC is expected to raise economic expectations, it will maintain a cautious inflation outlook. In addition, it is expected that the Fed’s latest dot plot will largely reaffirm the view that policy rates will remain at their current low levels for the next few years.
Finally, the Fed may expand the exemptions to the supplementary leverage ratio rule to help large U.S. banks better absorb the supply of U.S. Treasuries, thereby dampening the recent rise in U.S. bond yields.
Credit Agricole believes that a more dovish Fed meeting than expected could boost risk sentiment and weigh on the dollar against related risk and commodity currencies. However, the bank still sees USDJPY and USDCHF buying on the dips, especially if the upcoming U.S. data release surprises with an improvement.
Conversely, if the Fed does not release a strong signal of suppression, the spread between the 2-year Treasury yield and the 5-year Treasury yield and the 7-year Treasury yield before it could continue to climb, according to analysis by Kevin Walter, co-head of global Treasury trading at Barclays, given that the market is forecasting an earlier rate hike.
For his part, Peter Chatwell, head of interest rate trading at Mizuho Bank, said that if this week’s economic forecast summary has the Fed expecting some rate hikes in 2023 in the dot plot, then the market may expect an earlier rate hike to the first half of 2022, and expects that the 1-year forward rate on the 5-year U.S. bond yield could move up 50 basis points. However, he also cautioned that this is not their neutral scenario, but a worst-case scenario.
For its part, Mitsubishi UFJ believes there is a risk that Powell’s emphasis on the Fed’s less-than-convincing commitment to accommodative monetary policy at this week’s FOMC meeting could send the dollar further higher in the near term.
Position data also shows that dollar shorts are retreating. Data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday, the size of the net short position held by speculators in the dollar fell to $22.29 billion in the latest week, a new low since mid-November last year, after a net short position of $27.8 billion in the previous week.
Meanwhile, both gold and silver longs are decreasing. For the week ended March 9, COMEX gold futures speculative net long position decreased by 15,961 hands to 41,896 hands, COMEX silver futures speculative net long position decreased by 3,829 hands to 27,677 hands.
② U.S. bond auctions again, bond market shorts increased greatly
Last week’s bond auction did not trigger a huge shock in the bond market, but this Tuesday (March 16), the U.S. Treasury will renew the $24 billion 20-year Treasury bonds.
JP Morgan strategists previously pointed out in a report that 20-year and 7-year bonds have been more susceptible to supply expansion, so investors still have to pay attention to the results of the relevant tender sale. Last month, the U.S. Treasury Department held a 7-year Treasury bond tender sale had triggered a market plunge. At that time, due to low demand, the winning bid rate soared, and yields on U.S. bonds of all maturities then began to “fly” mode.
Position data shows that the overall short position in U.S. bonds is increasing.
CFTC data show that as of the week of March 9, CBOT U.S. 5-year Treasury futures net short position of 14,305 hands, a week ago for a net long position of 26,487 hands; U.S. 2-year Treasury futures net short position increased 149,837 hands to 407,364 hands, U.S. 10-year Treasury futures net long position decreased by 49,480 hands to 46,131 hands, ultra-long-term Treasury futures The net short position decreased by 4781 lots to 250,679 lots.
U.S. Treasury Secretary Yellen again rejected inflation concerns, undoubtedly paving the way for U.S. bond shorts.
③Bank of England, Bank of Japan expected to stay put
Also on Thursday, the Bank of England will publish its interest rate resolution and minutes, the market is expected to maintain the Bank of England’s original monetary policy.
On Friday (March 19), the Bank of Japan will also announce its interest rate resolution, and Bank of Japan Governor Haruhiko Kuroda will hold a press conference. The market expects the BoJ to stay put as well, and the pace of ETF purchases may not be adjusted upward as often, but the magnitude may be increased. Expanding the tolerance range for the 10-year Treasury yield target, which is currently at 0%, is possible, but it is unlikely to be adjusted now because the BOJ governor is opposed to it.
Last week, a key figure in Japan’s “Abeonomics”, Yukizo Yamamoto, a member of The Japanese House of Representatives, stated that Japan needs a massive stimulus program like the United States.
Since the outbreak of the new crown last year, Japan has launched three rounds of fiscal stimulus package to fight the Epidemic and support the economy, a total of 73 trillion yen, or about $671 billion. According to Yamamoto, Japan will need another budget of comparable amount as a stimulus plan for the new fiscal year starting in April.
He believes that there will be no major changes in the Bank of Japan’s policy at the meeting held this week. But no matter what kind of adjustment the BOJ implements, the BOJ’s policy cannot play a bigger role if there are no more bonds to buy, which is one reason why more government spending is so important. He also said that increased government spending and bonds issued for this purpose would help drive the BOJ’s easing initiatives and have a favorable impact on the Japanese currency and stock market.
④Will the “scary data” reignite inflationary expectations?
Last week’s U.S. CPI data released to ease inflation anxiety, coupled with the demand for U.S. Treasury bonds are also good, the dollar and U.S. bond yields had both fallen, the market back to risk trading, gold also climbed once. As you can see, the impact of important data on market sentiment is now more obvious.
This Tuesday (March 16) at 20:30, the United States will be released known as the “horror data” of February retail sales data.
If the data is better than expected, inflation fears will heat up again, thus giving U.S. bond yields higher boost, and the data is released before the Fed resolution, the market will also increase its hype.
If the data is weaker than expected, it is expected to be the same as last week’s CPI data, giving the market a respite, which will also be considered conducive to the Fed’s reinforcement of dovish rhetoric this week.
⑤ U.S. stocks “four witching days” + $1,400 bailout money arrives, new liquidity floodgates open
Friday (March 19) will be a “four witch day” for U.S. stocks, which may trigger increased volatility in the U.S. stock market due to the quarterly settlement.
In addition, U.S. President Joe Biden on Friday (12) began to issue the first batch of $ 1,400 grants, the earliest subsidized families can receive at the end of the week. Economists predict this bailout will boost the country’s economic recovery in the coming months.
A survey of retail investors by Deutsche Bank shows that 37% of the amount of direct money handed out by the U.S. government this time will go into the stock market, with the amount of money at about $150 billion. The previous stimulus cash handout pushed the U.S. stock market to a new high in January.
Simon Peters, an analyst at multi-asset investment platform eTOro, said the latest stimulus package passed by the White House is significant for risky assets, especially cryptocurrencies, and that “the floodgates of new liquidity have opened. Just this past weekend, we did see bitcoin surge again and at one point it was back above $60,000 per coin. Philip Swift, co-founder of US market analysis firm Decentrader, believes the next high for Bitcoin is $70,000.
(6) Be wary of geopolitical risks!
Investors also need to keep an eye on news on the geopolitical front in the Middle East.
Just after the opening bell on Monday, Russian satellite news said that oil facilities in Syria’s Aleppo province were hit by rockets, injuring members of the Turkish-backed group. The news spurred gold, silver and crude oil to rise early in the Asian session.
In addition, according to CCTV news, the situation in Yemen has continued to be tense recently, with Yemeni Houthis repeatedly claiming to use Drones and missiles to launch attacks on targets in Saudi Arabia since March, and the Saudi-led multinational coalition launching intensive airstrikes on targets in Yemen since March 7. At the same time, Yemeni government forces are engaged in a tug-of-war with the Saudi-led multinational coalition and the Houthis supporting them in several provinces in the west and north of Yemen.
The market expects the recent geopolitical news to be an unpredictable factor affecting the market.
The current bullish atmosphere in the crude oil market is strong, and according to the CFTC, the speculative net long position in WTI crude oil futures increased by 8,656 lots to 407,876 lots in the week ended March 9. The IEA will also release its monthly crude oil market report this week, so investors can pay attention to more data on the demand side.
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