The bond market selloff returned after President Biden signed the $1.9 trillion relief bill into law and as Americans embrace the idea of a normal summer. The US is winning the COVID fight and it seems the best-case scenarios for the economy are happening. President Biden is an experienced politician and he knows it is best to under-promise and overdeliver. Biden’s goal of July 4th to get America “closer to normal” really means that this economy is likely to run hot in June. If all Americans are eligible for a COVID-19 vaccine by May 1st, expectations will be high that most states will have already lifted their COVID restrictions.
Prior to today, bond yields appeared to be stabilizing and many analysts were expecting next week to be an easy FOMC policy meeting that was going to deliver much of the same rhetoric from Fed Chair Powell. If the bond market selloff intensifies leading up to the March 17th FOMC decision, the Fed may finally have to push back against the move in Treasury yields. The Fed has clearly stuck to the script that tighter financial conditions or disorderly markets would warrant action and if yields maintain a skyrocketing trajectory, they will become more vocal.
Risk aversion Friday is sending US stocks lower, with the Nasdaq bearing the brunt of the decline as Treasury yields soar. Hurting the Nasdaq was also the news that Tencent was beginning to face tougher scrutiny from China’s antitrust watchdog.
US Data
US producer prices delivered another solid gain. Following last month’s best increase since 2009, producer prices increased 0.5% on a monthly basis, in-line with expectations and down from the 1.3% prior reading. The PPI Final demand year-over-year rose from 1.7% to 2.8%, the biggest increase since 2018. These readings support a modest climb in overall prices and that is why Treasury yields pushed higher following the release. Next month, will see a strong surge in producer prices due to base effects and that could bolster the argument that runaway inflation is a short-term risk.
Oil
Crude prices initially slumped after a strong dollar returned and after India’s oil demand plummeted to the lowest levels since August. The decline in oil prices is somewhat limited as expectations grow for Americans to deliver a much better-than-expected demand for crude this summer. Biden’s goal of July 4th to get America “closer to normal” is a gamechanger for fuel demand forecasts. Car bookings and plane tickets are indicating Americans are going to travel big this summer and that should help bring back fuel demand.
Brent crude will remain stuck around the $70 level until the oil demand outlook improves in Europe, which will only happen when they stop struggling with COVID variants. The US is still not in the clear over virus variant risks, but it seems that any setback would only be temporary now that much of the country is close to getting vaccinated. Rising rig counts could provide some profit-taking in crude, but the outlook still remains very bullish over the medium-and long-term.
Brent pared losses after reports an Iranian container ship was hit by explosives in the Mediterranean. The wildcard for oil prices over the summer will remain geopolitical risks in the Middle East that deliver any disruption with the transportation or output in crude.
Gold
Gold was supposed to have a nice first weekly gain but a risk-off session in Asia triggered a bond market selloff that sent both Treasury yields and the dollar higher. Right now, gold is getting bullied by rising Treasury yields. After surviving three key Treasury auctions (3s, 10s and 30s) with decent demand, gold thought it was going to have an easy Friday, but the bond market had another idea.
It looks like the bond market wants to make this an interesting FOMC event with much higher Treasury yields. Gold’s key bottom of $1,673 should hold before Wednesday’s Fed policy decision, but if the 10-year Treasury yield skyrockets beyond 1.70%, that would trigger a panic selling move in gold.
Bitcoin
Bitcoin took a tumble after reports the CFTC is investigating Binance Holdings Ltd., the world’s largest cryptocurrency exchange. The investigation focuses on whether Binance, an unregistered CFTC member allowed Americans to buy cryptocurrencies.
If we didn’t have cryptocurrency ETFs and futures trading, this probe news would have dragged Bitcoin sharply lower. This investigation will undoubtedly be a headwind as many Americans see probes spreading across all the major platforms.
Bitcoin’s easy path toward $60,000 just got derailed, but massive selling pressure still seems unlikely because these probes will likely mean only more restrictive measures to curtail money laundering and sanctions violations. The crypto world is fully expecting some regulatory changes, so this should not change the fundamental case for a much higher Bitcoin in the long-term.
