Fed in focus, Markets ignore retail sales, Oil softer, Gold bottom may be in place

US stocks are mixed, with the Nasdaq leading the charge higher as bond yields stabilize.  The bond market will likely continue to push back on the Fed’s stance that despite the tremendous progress with the economic recovery, they are nowhere near ready to start thinking about changing their plans for interest rates and bond purchases.  The Fed has clearly signaled that inflation can overshoot and the traders might test the Fed’s patience by sending long end rates much higher.  The Fed won't do anything major tomorrow, as they will wait until the 10-year Treasury might breaks beyond 2.0% and for financial conditions to deteriorate.  Talks about Operation Twist or Yield Curve Control (YCC) could be warranted during the summer, but right now the Fed needs to decide do they want to follow the ECB and push back a little over the recent rise in yields.

The Fed will deliver an improved growth outlook and if some policymakers eye a rate increase in 2023, that could help alleviate some bond market pressures.  Wall Street is expecting the Fed to slow asset purchases at the end of this year and for an interest rate hike at the November 2022 meeting.  No one doubts that the Fed will reaffirm their ultra-patient stance, but they need to show markets that they understand the improved outlook is driving long-term yields higher and that they are closer to acting if the bond market selloff deepens.  

US Data

A wrath of US economic data painted a mixed picture, but in the end didn’t really matter.  Retail sales in February had a tough act to follow, since the January reading was revised higher, showing the impact of the December Trump stimulus checks.  The deep freeze hit the South last month was the primary reason advance retail sales posted a 3.0% decline, which was much worse than the -0.5% forecast. 

Industrial production in February also took a big hit, but is widely expected to bounce back in March. 

The NAHB housing market index was also impacted by extreme weather, but may have also confirmed that the peak of home buying is likely behind us.  The NAHB HMI fell 2 points to 82, a sign that rising interest rates and higher material prices are dragging builder confidence.  Demand is still healthy, but relentless housing market demand will continue to moderate.

The dollar is mixed today as Treasury breakeven rates continue to push higher.  The 30-year breakeven rate rose to 2.2385%, the highest level since 2014.  The greenback seems poised to consolidate until financial markets are beyond the Fed decision.  

Oil

Crude prices are headed lower for a third consecutive day on supply concerns and after major European nations suspend use of the AstraZeneca vaccine.   Many energy traders are also focusing on growing Iranian oil exports into China.  Iran is exempt from supply restriction and could be taking away sales from other OPEC countries, like Angola.  Reports that Angola’s preliminary plan will include a reduction of oil exports to 1.05 million bpd in May could be a sign that demand outlook is waning.  

Europe’s vaccine rollout is taking a big hit now that Germany, France, Italy, and Spain suspended use of AstraZeneca's COVID-19 vaccine and that should diminish the crude demand outlook in the short-term.  AstraZeneca has noted a careful review of all available safety data of more than 17 million people vaccinated in the European Union (EU) and UK with the COVID-19 vaccine has shown no evidence of an increased risk of pulmonary embolism, deep vein thrombosis (DVT) or thrombocytopenia, in any defined age group, gender, batch or in any particular country.  

Thailand has resumed use of the AstraZeneca vaccine, while Australia announced they do not intend to stop using it.  A key EMA review on Thursday could greenlight the vaccine for much of Europe, but concerns are growing that many will remain hesitant for that particular vaccine.  

The European pause in vaccine rollout will likely be temporary but remains disruptive to the crude demand short-term forecast.  

WTI crude looks like it will stay trapped in its mid-$60s cage.  

Gold

Gold buying is starting to stabilize now that a majority of fund managers believe US stocks are at the late-stage of the bull market.  Gold could eventually resume its role as inflation hedge if rising Treasury yields primarily leads to a stock market selloff due to taper tantrum concerns. 

For gold to turn bullish, the Fed needs to stick to ultra-dovish script and push back on the bond market.  Skyrocketing Treasury yields will eventually disrupt the economic recovery and the Fed needs to be more vocal about how much they will tolerate.  The Fed needs to signal at what level they are comfortable with inflation overshooting to and for how long.  

Bitcoin

Bitcoin is declining for a third consecutive day as liquidations appear to be growing at a fast pace for many short-term investors.   Glassnode co-founder noted yesterday that nearly $500M in Bitcoin longs got liquidated after prices hit the all-time high.  Also adding that Long Term Holders (LTH) remain adamant about buying more BTC.  

Bitcoin seems like it will consolidate a while longer, with tomorrow's Fed decision likely being a short-term catalyst.