Today’s podcast

https://soundcloud.com/user-291029717/will-the-rba-play-catch-up?in=user-291029717/sets/the-morning-call

Overview: Eye of the tiger

• Fed’s Powell tacitly endorses yields moves, but maintains a dovish outlook as largely expected
• Yields accordingly mostly consolidate recent moves with US 10yr -0.5bps to 1.36%
• Equities pare losses to trade in the green: S&P500 +0.1%; Russell 2000 -0.9%; NASDAQ -0.3%
• Will the RBA to come out swinging today? AFR’s Kehoe suggests they are ready to defend 3yr YCC
• Coming up: RBA QE purchases (Kehoe), AU Wages, RBNZ, BoE Speak, Fed Speak incl. Clarida

“Just a man and his will to survive; So many times it happens too fast; You change your passion for glory; Don’t lose your grip on the dreams of the past; You must fight just to keep them alive”, Survivor 1982

Central banks are taking a mixed view of the rise in yields with the Fed’s Powell overnight tacitly endorsing market moves, while it seems the RBA is preparing to come out swinging to defend the 3yr target and reinforce guidance of rates being on hold until at least 2024 (see AFR article ). One wonders if RBA Governor Lowe has Rocky Balboa in mind as he eats his cornflakes this morning and how much of the April 2024 bond he is willing to own (more on that below). As for the Fed, Chair Powell noted the run up in yields was “a statement of confidence” in the outlook, echoing the remarks by his colleague Kaplan on Monday of “would not be surprised if Treasury yields rise as growth outlook improves.

Looking at market reaction, Chair Powell has managed to tread that fine line of endorsing market moves, but not adding to them by re-iterating his dovish stance. Powell’s prepared remarks noted that noted “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved”. QE will continue at its current pace “until substantial further progress has been made toward our goals ”. Concerns around inflation were also tempered with Powell noting that “for some of the sectors that have been most adversely affected by the pandemic, prices remain particularly soft”. (see Semiannual Monetary Policy Report to the Congress). In the Q&A he gave the tacit endorsement to the move in yields (“In a way, it’s a statement on confidence on the part of markets that we will have a robust and ultimately complete recovery”).

Yields accordingly mostly consolidated their recent moves with the US 10yr -0.5bps to 1.36%.

Equities are paring losses into the final hours of trade, with the S&P500 eking into the green +0.1% with a clear tilt in sector performance towards financials (+0.5%) and energy (+1.8%). Interestingly small caps are underperforming with the Russell 2000 -1.0%.

FX has been fairly muted in response with the USD DXY +0.2% with EUR -0.2%. GBP continues to outperform, +0.2% to 1.4108. The AUD is little changed at -0.1% to 0.7911, while commodity prices remain supportive to a move above 0.80 and beyond as our FX strategists forecast – note copper overnight was up 1.2%

Focus has started to return to the US $1.9 trillion stimulus package with a vote in the House expected by the end of the week. Budget reconciliation looks like the only way to pass with centrist Republican Senator Susan Collins not expecting a single Republican vote for the stimulus package.

There was little in the way of other data overnight. The US Conference Board Consumer Confidence Index was broadly expected at 91.3 v 90.0 expected. UK unemployment was also as expected at 5.1%, though with larger than expected falls in employment (-114k v. -30k expected).

Finally, the Australian government’s majority in the lower house has been reduced following the resignation of one member (Craig Kelly). The government now has 76 MPs out of 151, but after supplying the speaker has just 75 votes. The AFR reports the government has signed an agreement with a crossbench MP (Bob Katter). Reduced government numbers increases the chances of an election occurring in 2021.

Coming up today

All focus on central banks and the recent moves in yields. Domestically the AFR’s Kehoe writes the RBA is set to come out swinging today in QE, while across the Ditch the RBNZ meets. There is also plenty of central bank talk, including from BoE Governor Bailey and the Fed’s Powell, Clarida and Brainard. Details below:

• AU: RBA QE Purchase: The RBA is set to come out swinging today with QE purchases according to the AFR’s Kehoe (see AFR article). With the RBA in self-imposed blackout it appears Martin Place has reached for the media button, with Kehoe writing “Expect Lowe and deputy governor Guy Debelle to step up to the plate” and where “ doubts should be vanquished when the RBA buys state government bonds on Wednesday and federal government debt in the secondary market on Thursday – after its $1 billion of purchases on Monday fell short of expectations”. The RBA now owns almost half (47%) of the $33 billion of April 2024 federal government bonds on issue. My colleague Skye Masters notes how much is the RBA willing to own of this bond? If the RBA purchases at least $5bn, that would push ownership up to 63% (note in mid-Nov/early Dec the RBA purchased $7.5bn worth to preserve the target).
• AU: Wages and Construction: Q4 Wages and Construction figures are unlikely to be market moving, though attention will start to shift towards wages in coming quarters as the labour market tightens. Consensus see wages at 0.3% q/q with the annual rate falling to 1.1%. Construction work done is expected to rebound 1.0% q/q, though there may be slight downside risks given the unusually wet weather may have reduced days available for construction.
• NZ: RBNZ & Press Conference: A lot has changed since the RBNZ’s last forecast update in early November, including the rolling out of vaccines, a much better global outlook, clear evidence of stronger domestic inflationary pressure and a much better than expected labour market. The key question is how the RBNZ will frame the policy outlook. We think it’s likely the Bank reaffirms, at this stage, that it will buy bonds under its QE programme until June 2022, and there is a chance the MPC guides the market towards expecting some further gradual tapering in the pace of purchases this year.  The Bank will want to avoid a post-MPS surge in the NZD, but as we have seen post the RBA’s overtly dovish early-February Statement, the Bank’s ability to hold back the NZD is limited, if not non-existent, against the backdrop of the global reflation trade.
• GE: Final Q4 GDP Measure: Consensus sees the final measure of Q4 GDP at 0.1% q/q
• UK: BoE Speakers: Governor Bailey gives testimony to parliament’s Treasury Committee. Chief Economist Haldane is also speaking separate on the Changing Nature of Work, while
• US: New Home Sales: consensus sees a 1.5% m/m lift for January.
• US: Fed’s Brainard/Clarida/Powell: The Fed’s most influential voices are speaking with Clarida and Brainard the ones to watch. Clarida is talking about the economic outlook, while Brainard is discussing the Fed’s maximum employment mandate. Meanwhile Powell is giving his next lot of testimony to the House which is likely to repeat his remarks to the Senate.

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