- Powell greenlights T-note yield surge
- Senate expected to pass by $1.9 trillion pandemic aid bill this weekend
- OPEC+ surprises the market by refusing to boost output
- Feb job growth expected to improve from January’s dismal pace
Powell greenlights T-note yield surge — Fed Chair Powell on Thursday confirmed that the Fed is not opposed to the recent surge in T-note yields when he said he would only become concerned if the yield surge becomes “disorderly.”
Specifically, Mr. Powell said that last week’s yield surge “caught my attention.” He also reiterated that the Fed is a long way from reaching its policy goals of full employment and an average inflation rate of 2.0%, suggesting that there is currently no end in sight for the Fed’s near-zero target rate or the $120 billion per month QE program.
However, Mr. Powell also said, “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.”
The markets were hoping that Mr. Powell might push back against the surge in yields, as ECB officials are doing. ECB officials have been trying to talk down yields and have threatened to adjust their QE program to cap the yield rise.
The 10-year T-note yield on Thursday moved sharply higher and closed +8 bp at 1.56%, which was the highest close in a year and just 5 bp shy of last Thursday’s 1-year high of 1.61%. The 10-year T-note yield is now only 36 bp below the pre-pandemic level of 1.92% seen at the end of 2019.
The 10-year T-note yield yesterday also moved higher due to the sharp +4% rally in crude oil prices. The combination of aggressive fiscal stimulus measures and the sharp rally in crude oil prices seen since November have pushed inflation expectations sharply higher, thus putting upward pressure on T-note yields. The 10-year breakeven inflation expectations rate yesterday closed at 2.21%, which is well above the Fed’s +2.0% inflation target and just 5 bp below the mid-Feb 6-1/2 year high of 2.26%.
Senate expected to pass by $1.9 trillion pandemic aid bill this weekend — The Senate has some long hours ahead in trying to get the $1.9 trillion pandemic aid bill passed. The Senate Thursday afternoon began 20 hours of debate. The Senate on Friday is expected to begin a “vote-a-rama,” where Senators are forced to vote on a slew of amendments. Due to all the delays, the Senate is not expected to pass the bill until sometime this weekend.
Nevertheless, there is a near 100% chance that the Senate will pass the bill in roughly its current form. The House will then have next week to pass the revised bill, thus getting final approval of the bill before the self-imposed deadline of March 14 when some unemployment benefits will expire.
After passing the pandemic aid bill, Democrats will then move on to another big stimulus bill that includes infrastructure and clean energy spending and a host of other projects. The markets will be watching the progress of that bill very carefully because it is likely to include tax hikes, including an increase in the corporate tax rate, the capital gains tax, and possibly higher individual tax rates on wealthier Americans.
OPEC+ surprises the market by refusing to boost output — April crude oil prices on Thursday rallied sharply to a new 14-month high and closed the day up +2.55 (+4.16%) at $63.83 per barrel. April RBOB gasoline prices rallied by +2.36% and posted a new 1-1/2 year high, with the extra help from the recent cold snap in Texas that closed down some U.S. refinery capacity.
Oil prices rallied sharply on Thursday after OPEC+ at its monthly meeting decided not to increase production, which was a surprise relative to market expectations for a production hike of 500,000 bpd to 1.0 million bpd. In addition, Saudi Arabia agreed to extend its voluntary 1.0 million bpd production cut through April.
Oil prices have risen steadily since last November due to the production cut by OPEC+ and the improvement in crude oil demand sparked by the fading pandemic. The combination of improved demand and restricted supply has caused the oil market to come back into supply/demand balance.
In fact, the OPEC+ Joint Technical Committee (JTC) on Wednesday forecasted that global crude stockpiles will remain on track to decline each month this year and drop below their 5-year averages even if OPEC+ restores 2.4 million bpd of crude output by June.
Feb job growth expected to improve from January’s dismal pace — The consensus is for today’s Feb payroll report to show an increase of +195,000, recovering somewhat from January’s very weak report of +49,000. However, today’s payroll report could take a hit from the cold snap that invaded the south and caused severe business disruptions.
Payroll growth should start improving significantly going into spring as the reduced pandemic figures allow business restrictions to be progressively dropped. However, the U.S. labor market has a long way to go before returning to pre-pandemic levels. In fact, payrolls would need to rise by another 9.9 million to reach last February’s pre-pandemic record high.
Today’s Feb unemployment rate is expected to be unchanged from Jan’s 10-month low of 6.3%. The unemployment rate has dropped sharply from last April’s record high of 14.7%, which was posted during the height of the pandemic shutdowns. However, the unemployment rate is still well above the record low of 3.5% seen before the pandemic began in early 2020. Also, the unemployment would currently be higher than the nominal figures suggest if many people had not dropped out of the labor market due to pandemic concerns or to take care of children who couldn’t attend school.
