[Market Review
10-year U.S. bond yield fell back to 1.5%
Before the Fed’s interest rate resolution this Thursday, most varieties maintained sideways oscillation, in which the 10-year U.S. bond yield traded in the 1.4%-1.5% range. After the Fed’s interest rate resolution, the 10-year U.S. bond yield once spiked to 1.59%.
There were two major highlights of this interest rate resolution. First, the overnight reverse repo rate and the excess reserve rate were raised. Second, the dot plot shows that the first rate hike was brought forward. By the end of 2023, the Fed will raise interest rates twice. The Fed released a “hawkish” signal, once pushed up long-term U.S. bond yields.
But we can see that the 10-year U.S. bond yields basically retracted the previous gains, back to 1.5%. Analysts say this is because investors may interpret the Fed’s hawkish bias as a potential new environment in which monetary policy is less accommodative and U.S. economic expansion in the aftermath of the epidemic may be more difficult to achieve.
U.S. initial jobless claims unexpectedly picked up. While the Fed has become “hawkish,” the U.S. job market has run out of steam, with Thursday’s disappointing initial jobless claims number increasing to 412,000 from 375,000 the week before and the non-farm payrolls report coming in well below expectations for the second straight month.
The U.S. Democratic Party is considering bypassing the Republican Party to pass a budget plan. In this context, the U.S. Democratic Party is still trying to push the stimulus plan. Senate Democrats are discussing a $6 trillion budget package, about half of which would be financed through the deficit, according to people familiar with the matter. The package, which expands on President Joe Biden’s jobs and families plan, would bypass Republican obstruction through a budget reconciliation process. Democratic senators said a bipartisan group is expected to have an infrastructure proposal ready by next Monday.
The U.S. dollar index is shaking at higher levels. The U.S. Dollar Index remained high despite another pullback in U.S. bond yields. After the Fed’s interest rate resolution, the dollar index continued to oscillate upward, hitting a high of 92.02, and is still oscillating sideways above the 91 mark.
Gold fell below $1,800. Against the backdrop of the dollar index maintaining a high level of oscillation, gold continued to be under pressure to the downside and has now broken below $1,800, touching a low of $1,767.17 per ounce, down a total of more than $90 during the week.
Silver fell more than 6% during the week. The trend of silver is similar to that of gold, after falling to $26.6, silver prices did not stop the decline and continued to slide to near $26, and once fell below the mark, down to touch $25.75 per ounce, a decline of more than 6% during the week.
The euro was declining. Likewise, non-U.S. currencies were not immune. The euro fell by more than 190 points against the dollar this week. Compared with the Federal Reserve, the European Central Bank’s attitude seems more dovish, which dragged down the euro.
The British pound broke below the 1.40 handle. Turning to the British pound, the pound also fell about 200 points against the dollar this week and has now broken below the 1.40 handle. In addition to the dollar rally, the disagreement between the U.K. and the EU over Northern Ireland has added to the pound’s volatility.
U.S. oil is hovering above $70. Finally take a look at look at the oil market. U.S. oil approached $73 this week before pulling back, but still traded above $70. API and EIA crude oil recorded a big drop of 7 to 8 million barrels, which boosted oil prices. In addition, market expectations for summer travel also supported oil prices.
[Risk Warning].
The ECB may remain dovish, the euro is afraid of continued pressure
Danske Bank expects the Fed to start tapering QE from the fourth quarter of this year and complete this action next summer, paving the way for the subsequent rate hikes and tapering, while the euro will enter a downward cycle against the dollar considering that the ECB will still maintain emergency bond purchases to save the market in the same period. The currency pair is expected to hold at 1.19 a line at the end of the third quarter of this year, and will fall further to 1.15 by the middle of next year.
Negative factors highlight the British pound may fall to 1.38
Westpac pointed out that the trade agreement reached between the UK and Australia is the first trade agreement reached since the UK left the EU that is completely independent of the EU. The UK hopes to build on this and differentiate its post-Brexit financial system. Against the backdrop of disagreements between the U.K., Europe and the EU over Northern Ireland, the conclusion of the U.K.-Australia agreement could exacerbate tensions with the EU.
Survey data ahead of next week’s regular Bank of England meeting should show potential for further recovery, but a delay in easing all new crown virus restrictions could dampen near-term recovery prospects. Short-term conflict may put pressure on GBPUSD to fall towards 1.38.
Bank of England will raise interest rates early but will not adjust the pace of bond purchases
UBS said the Bank of England may conduct its first interest rate hike later in 2022, given the brighter growth outlook for the U.K. economy and the unexpectedly low rate of unemployment growth, which is expected to eliminate idle capacity in the U.K. more quickly.
In terms of quantitative easing, the Bank of England is expected to continue to fully implement its 150 billion pound Treasury bond purchase program, meaning that the current pace of bond purchases will not be adjusted.
Key Forecast
11:00 The Bank of Japan is expected to stay put
Japan’s core CPI has fallen for nine consecutive months year-on-year, with weak demand and rising industrial costs casting another shadow over the country’s fragile economic recovery. To add insult to injury, the epidemic continues to recur on the downside, originally the market generally expected the Japanese economy to rebound slightly in the second quarter, but the gradually out-of-control direction of the epidemic, forcing the government to re-declare an emergency, hitting the already sluggish consumption hard.
The data showed that the Bank of Japan did not buy listed traded funds in May, the first time since 2013 that it did not intervene in the market for a full month. In March, the BOJ dropped its numerical target for the pace of ETF purchases and pledged to intervene in the market only when market stress is severe. The BOJ previously announced the same bond-buying program for June as it did in May.
This week, the former executive director of the BOJ said the BOJ could perhaps start discussing in 2023 the way it should exit its unconventional stimulus program, such as removing negative interest rates. Such a move would allow the BOJ, like other central banks around the world, to gradually focus on exiting policies introduced in crisis mode. The official also said that the BOJ may extend the epidemic rescue program due in September, but there is no rush to take further measures.
An agency survey expects the BOJ to keep its main policy unchanged and may make small adjustments to its policy toolbox by extending assistance to companies hit by the epidemic.
About 89% of the 44 economists surveyed believe that the BOJ will maintain negative interest rates and asset purchase settings, with most believing that no changes will occur in the foreseeable future. About 60% of respondents said they expect the BOJ to extend the current epidemic lending measures after they expire in September.
14:30 Kuroda Haruhiko may maintain dovish stance
Later, BOJ Governor Haruhiko Kuroda will hold a briefing. Last month he said that the impact of the new crown epidemic is uneven and the risks to the Japanese economy are skewed to the downside. The special outbreak response plan will be extended until September if necessary, and the related plan for the outbreak will be extended if necessary. The BOJ will continue its accommodative policy in the wake of the new crown pneumonia outbreak. The Japanese economy is expected to return to its pre-epidemic level by the end of the year. In the case that the Japanese economy is not recovering strongly, Haruhiko Kuroda may maintain a dovish stance, which may be a drag on the yen.
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