This year’s sharp rise seen in bond yields has slowed for now as investors get to grips with the potential strength of the economic rebound and the ensuing implications for central banks around the world
There appears to be no let-up in the surging economic data coming out of the world’s foremost economy. “The land of the free” is firing on all cylinders with recent releases suggesting a very strong recovery in the labor market and leading indicators pointing to rapid growth in both services and factory sectors. Meanwhile, this year’s sharp rise seen in bond yields has slowed for now as investors get to grips with the potential strength of the economic rebound and the ensuing implications for central banks around the world.
For record stock markets, the only thing that matters is the largesse of these central banks. This is not a new factor of course but has been exaggerated and magnified by the pandemic with the unprecedented fiscal support of governments equally fueling asset prices. Is the day of reckoning when that distant risk of withdrawal of this support approaching?
Inflation figures have not picked up in any meaningful way to trouble the US Federal Reserve yet. And the central bank’s commitment to its new approach to monetary policy, in effect to let the economy run “hot” by allowing inflation to run above its longstanding 2 percent target to make up for the prolonged periods of undershooting it, seems steadfast for now. In any event, the Fed’s approach to a move in policy will kick off with a winding down of its $120 billion monthly asset purchase program. This will provide investors with a helpful cue about the eventual lift-off in interest rates given that the tapering of bond buying is to happen before rate adjustments.
The key issue for many is whether the surging US economic recovery ultimately forces the Fed’s hand, especially with markets pricing in a rate rise as soon as next year. This is in no small part due to President Biden’s huge fiscal support package which may be further bolstered by the proposal of a new multi-trillion-dollar infrastructure bill. This kind of fiscal support, allied with pent-up demand and unprecedented income growth which we outlined in a previous article, is certainly adding more fuel to the – dare we say it – booming US economy. Many analysts are expecting economic data to continue in this vein, with over a million jobs to be added next month, which will equate to a near 10 percent expansion of nominal GDP in just 12 months. Surely if this does occur, then 10-year US Treasury yields currently at 1.7 percent are way too low and will inevitably go higher.
One asset that has so far struggled in this environment this year has been gold, falling 10 percent and suffering its worst quarter since the final three months of 2016. Higher bond yields have dulled its appeal as the precious metal provides no-interest payments, while the interminable rise of stocks has further dented gold’s allure. The other major headwind has been the performance of the dollar which has certainly been supported by the more aggressive pricing of early Fed action and policy rate lift-off.
It seems the reflation narrative is now well baked into markets but may have more to run if investors are further encouraged by strong economic data releases. A rise in bond yields may further weigh on the yellow metal but it’s worth keeping an eye on policy actions that could help drive inflation as economies fully reopen in the second half of this year.
Hussein Sayed, Chief Market Strategist at FXTM
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Boom time in the US
This year’s sharp rise seen in bond yields has slowed for now as investors get to grips with the potential strength of the economic rebound and the ensuing implications for central banks around the world
Hussein Sayed, Chief Market Strategist at FXTM
There appears to be no let-up in the surging economic data coming out of the world’s foremost economy. “The land of the free” is firing on all cylinders with recent releases suggesting a very strong recovery in the labor market and leading indicators pointing to rapid growth in both services and factory sectors. Meanwhile, this year’s sharp rise seen in bond yields has slowed for now as investors get to grips with the potential strength of the economic rebound and the ensuing implications for central banks around the world.
For record stock markets, the only thing that matters is the largesse of these central banks. This is not a new factor of course but has been exaggerated and magnified by the pandemic with the unprecedented fiscal support of governments equally fueling asset prices. Is the day of reckoning when that distant risk of withdrawal of this support approaching?
Inflation figures have not picked up in any meaningful way to trouble the US Federal Reserve yet. And the central bank’s commitment to its new approach to monetary policy, in effect to let the economy run “hot” by allowing inflation to run above its longstanding 2 percent target to make up for the prolonged periods of undershooting it, seems steadfast for now. In any event, the Fed’s approach to a move in policy will kick off with a winding down of its $120 billion monthly asset purchase program. This will provide investors with a helpful cue about the eventual lift-off in interest rates given that the tapering of bond buying is to happen before rate adjustments.
The key issue for many is whether the surging US economic recovery ultimately forces the Fed’s hand, especially with markets pricing in a rate rise as soon as next year. This is in no small part due to President Biden’s huge fiscal support package which may be further bolstered by the proposal of a new multi-trillion-dollar infrastructure bill. This kind of fiscal support, allied with pent-up demand and unprecedented income growth which we outlined in a previous article, is certainly adding more fuel to the – dare we say it – booming US economy. Many analysts are expecting economic data to continue in this vein, with over a million jobs to be added next month, which will equate to a near 10 percent expansion of nominal GDP in just 12 months. Surely if this does occur, then 10-year US Treasury yields currently at 1.7 percent are way too low and will inevitably go higher.
One asset that has so far struggled in this environment this year has been gold, falling 10 percent and suffering its worst quarter since the final three months of 2016. Higher bond yields have dulled its appeal as the precious metal provides no-interest payments, while the interminable rise of stocks has further dented gold’s allure. The other major headwind has been the performance of the dollar which has certainly been supported by the more aggressive pricing of early Fed action and policy rate lift-off.
It seems the reflation narrative is now well baked into markets but may have more to run if investors are further encouraged by strong economic data releases. A rise in bond yields may further weigh on the yellow metal but it’s worth keeping an eye on policy actions that could help drive inflation as economies fully reopen in the second half of this year.
Hussein Sayed, Chief Market Strategist at FXTM
Follow us on
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