The major US indices erased earlier losses and the long-maturity treasury yields reached a delightful moment of release after the Federal Reserve (Fed) Chair Jerome Powell told the US policymakers that the monetary policy will remain unchanged until substantial progress is made in the US jobs market, and more importantly turned a blind eye on the rising inflationary pressures. According to him, the skyrocketing sovereign yields are due to expectations that the economic conditions would get to their pre-Covid levels, and not because we will see an uncontrollable rise in inflation levels amid the XXL monetary-fiscal stimulus cocktail. He defended that the inflation will remain under control even though we may see an uptick in the coming quarters, and that there is no particular link between fiscal spending and inflation nowadays.
And that’s all investors could get regarding Joe Biden’s $1.9 trillion extra additional package that is about to see the daylight – that there should be no particular impact on inflation.
That should’ve been music in investors’ ears, but this time, the market questions what if the iceberg is too close. In fact, avoiding the inflation talk won’t necessarily solve the problem. If nothing, the rising energy and commodity prices and softening US dollar can only translate into higher consumer prices. And the fact that we have seen a record jump in the latest producer prices to 2% does remain worrisome to many. And if there is no cause-and-effect relationship between fiscal spending and inflation, there is a very clear relationship between the monetary, fiscal spending and the asset price inflation.
As such, Asian traders didn’t buy Powell’s speech. Equities in Japan, China and Australia fell. US and European futures were offered, as gold remained bid above the $1800 per oz.
Jerome Powell will speak again today, but he won’t say anything we don’t expect in his second day of testimony.
WTI crude fell on the back of a surprise build in US inventories last week. According to the latest API report, the US stockpiles increased more than a million barrels per day, while the expectation was another week of sizeable drop due to Texas demand. The more official EIA data could confirm a similar surprise at today’s release, remind investors that there is no durable supply-side issues in this market and weigh on oil prices.
In the FX, Cable extended gains to 1.4243 following a mixed jobs report in the UK yesterday. British employment plunged 114K in the three months to December, but the average earnings excluding bonuses rose 4.1% in December from 3.6% printed a month earlier and the jobless claims in January fell 20K versus an additional 35K expected by analysts. The idea that improved wages would translate into a faster inflation and refrain the Bank of England (BoE) from pulling out the negative rate weapon revived the GBP-bulls, although the strong appreciation in sterling should neutralize a part of the consumer price pressure in the coming months.
And finally, Bitcoin stabilizes near $50K following a plunge below the $45 mark on Tuesday. The Elon Musk-led sell-off came as a reminder that Bitcoin is not a safe haven asset, in contrary, it is a highly volatile asset, which is positively correlated to the risk assets, and particularly to tech stocks.
Speaking of Bitcoin, Tesla shares got hammered over the past two sessions on the back of the company’s decision to stop taking orders for its lowest-priced Model Y electric SUV and of course, the plunge in Bitcoin’s price. And the latest volatility in Bitcoin came as a reminder that mixing the company’s fortune with Bitcoin’s was maybe not a great idea for those investors who don’t necessarily want an exposure to Bitcoin volatility while investing in the electric car segment. As such, Elon Musk’s decision to invest $1.5 billion in Bitcoin may cost him more than just the Bitcoin’s plunge.
