[Market Review].
U.S. 10-year Treasury yields stopped falling and turned up. Dallas Fed President Kaplan stated that the Fed should start withdrawing monetary support soon after the end of the new crown epidemic. However, he did not state that he must end bond purchases completely before starting to raise interest rates.
After Kaplan’s speech, the Federal Reserve released the minutes of its March monetary policy meeting. The minutes show that officials believe that the economy is making substantial progress toward the Fed’s dual goal of stabilizing prices and maximizing employment “will take some time. Therefore, although the Fed released its quarterly economic forecast after the meeting, the U.S. GDP growth rate this year is expected to increase sharply from 4.2% to 6.5%, but also raised the three-year core inflation expectations, but did not take any new policy action. The dot plot, which reflects officials’ interest rate views, continues to argue that interest rates will not be raised until 2023 and keeps the current monthly bond purchase size of $120 billion unchanged. After the release of the minutes, the yield on the 10-year U.S. Treasury note stopped falling and rose above 1.67%.
The dollar index broke out of a two-week trough. The dollar index broke out of a two-week trough and hit a high of 92.5. For now, we also need to keep an eye on Biden’s infrastructure plan. The tax plan echoes the infrastructure plan. The latest news is that the U.S. Treasury Department has released a 19-page report on the Made in America Tax Plan. The plan aims to improve the competitiveness of U.S. companies and workers by eliminating incentives for offshore investment, significantly reducing profit shifting overseas by U.S. multinational corporations, counteracting “bottom-up competition” in global corporate tax rates, and providing tax incentives for clean energy production.
U.S. Treasury Secretary Yellen said the plan would bring $25 trillion to the United States over 15 years, bring about $2 trillion in corporate profits back to the United States over 10 years and generate about $700 billion in federal revenue.
On Monday, Yellen also said in a public speech that she would work with G20 countries to agree on the lowest corporate tax rate in the world to end a 30-year race to attract corporate investment with low corporate tax rates. This is interpreted as “Biden wants to force the world to follow the tax increase”.
Gold nearly fell below $1730. U.S. bond yields and the dollar index recovered slightly, limiting gold’s upside. Gold rallied twice during the session and was stopped near $1,741, narrowly missing $1,730 during the session.
Silver oscillated to the downside. Likewise, silver retreated intraday. Following yesterday’s modest decline, silver continues to oscillate lower this morning and is currently trading near $25.
The euro rose and then fell. Next, let’s focus on non-U.S. currencies. The euro rose and then fell against the U.S., hitting a high of 1.1914. Data showed that business activity in the eurozone resumed growth in the last month, which supported the euro against the dollar.
The British pound continued to retreat. The British pound, on the other hand, continued to come under pressure. Traders took profits after the strong rise in the pound in the first quarter, dragging the pound to a one-week low against the dollar. In addition, market skepticism about Johnson’s plan to reopen the economy also weighed on the pound.
U.S. oil rose slightly. Finally, a look at the oil market. U.S. oil rose slightly as the U.S. economic reboot heated up, helping to ease concerns about adverse news related to other regions and the epidemic. U.S. EIA crude oil inventories fell by 3.522 million barrels, a much larger drop than expected. However, the U.S. State Department held a briefing saying that the U.S. is preparing to lift sanctions on Iran. This may increase Iran’s oil exports.
[Risk Warning].
Crude oil: demand may be released, and the cloth oil will rise to $75
Analysts at Capitol Macro expect that releasing “pent-up” demand at a time of global supply constraints will exacerbate the market deficit and push up oil prices in the near future, with Brent crude peaking at $75 a barrel in the third quarter. After July, high oil prices will stimulate further production increases, and oil prices could fall to $70 by the end of the year.
Yen: U.S. bond yields rising momentum weakened U.S. and Japanese expected to fall further
Bank of Tokyo-Mitsubishi UFJ noted that the U.S. 10-year Treasury yield has fallen further below the peak level of 1.77% in the previous month. Given that the dollar against the yen has been the most sensitive currency pair to the fluctuations of U.S. bond yields, the weakening of the rising momentum of U.S. bond yields will make it difficult for the pair to stabilize above 110, which will eventually trigger a further correction down.
Euro: European pound hits new highs, expected to hit a snag at 0.8667
A trader based in Europe said that hedge funds are closing out short positions in the euro against the pound as a result of the company disc buying demand. On Wednesday, the euro rose 0.84% against the pound to 0.8663, a one-month high. Looking ahead, the pair may encounter resistance at the 55-day moving average of 0.8667.
[Key Forecast].
19:30 ECB may worry about higher bond yields
First, let’s focus on the ECB’s upcoming meeting minutes. Last month, the central bank kept three key interest rates unchanged, with the main refinancing rate held at 0%.
The ECB said it maintained the size of its emergency anti-epidemic bond purchase program at 1.85 trillion euros and that net purchases under the asset purchase program will continue at a rate of 20 billion euros per month. However, the pace of purchases under the emergency anti-epidemic bond purchase program will be significantly accelerated in the next quarter.
The central bank also said it will reinvest maturing Emergency Anti-epidemic Debt Purchase Program bonds until at least the end of 2023, and will continue to provide sufficient liquidity through refinancing operations.
In addition, the central bank raised its GDP growth forecast for 2021 and inflation expectations. The biggest highlight of the resolution is the commitment to accelerate the pace of bond purchases next quarter. The main aim is to curb rising bond yields, which could jeopardize Europe’s economic recovery.
Subsequently, ECB President Lagarde said that the overall economic situation will improve this year, headline inflation is likely to continue to rise in the coming months, and the ECB will see a temporary rise in inflation; the ECB stands ready to adjust all tools as needed.
Taken together, we expect that the ECB minutes may emphasize that inflation is likely to continue to rise, will accelerate the pace of bond purchases, and will adjust all tools as needed.
Also need to pay attention to whether the ECB will reveal news on tapering of bond purchases, if there is news in this regard, the euro is expected to gain support.
20:30 U.S. initial claims may be lower than the previous value
Next, let’s take a look at the initial jobless claims that will be released in the US. In recent weeks, the number of initial claims released in the U.S. has remained near 700,000, with last week’s release at 719,000.
CNBC commented that while weekly initial jobless claims remain very high from a historical perspective, the trend in jobless claims is declining as the U.S. economy continues to reopen and nearly 3 million Americans are getting their new crown vaccinations every day.
Currently, the market expects that the number of initial jobless claims in the U.S. for the week to April 3 will be 680,000. If the published value is much higher than expected, the dollar index may come under pressure; conversely, if the published value is less than expected, the dollar index may strengthen.
As vaccinations continue to advance, the U.S. labor market is expected to continue to recover, and initial claims are likely to decrease further.
Friday 00:00 Powell expected to mention interest rate adjustment
Finally, come focus on the upcoming speech by Fed Chairman Jerome Powell. Powell said after the March meeting that the Fed believes inflationary pressures are temporary, but the market remains concerned that this could become a bigger problem. Goldman Sachs also believes that the probability of U.S. inflation “out of control” is small, with only 31% probability of CPI exceeding 3% in the next five years. Investors will pay close attention to any new comments about inflation.
Powell also said that the Fed will reduce bond purchases as the economic recovery and goals make substantial progress. Analysts expect the Fed to develop a clearer framework for the reduction around mid-year, but will not really start reducing until 2022.
The minutes of the March meeting just released show that the Fed will maintain its ultra-loose monetary policy stance in the short term. Powell mentioned that money market rates may face downward pressure and that adjustments to the excess reserve rate and overnight reverse repo rate may be appropriate. He said that action may be taken at regular meetings or between meetings to keep the federal funds rate “within the range” of the 0% to 0.25% target.
On balance, Powell may reiterate that stronger inflation is only temporary and the Fed may adjust the excess reserve ratio and overnight reverse repo rate. In addition, investors need to pay close attention to his statement on bond purchases. If it is said that he re-emphasizes that he will taper the bond purchases at the right time, the dollar index is expected to gain support.
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