Powell Keeps Fed’s Ducks in a Row

Powell sticks to dovish script

Fed Chairman Jerome Powell stayed solidly on message overnight, emphasising once again the Fed’s priority in assisting the US employment recovery while dismissing inflation concerns as transitory. The dovish tone was enough to push US Treasury yields lower, dragging the US dollar with it while propelling stock markets higher with the S&P 500 recording a record close.

Mr Powell was helped along by US Initial Jobless Claims, which unexpectedly rose to 744,000 jobs lost. That was enough to spur a move out of cyclical stocks and into the market’s 2020 comfort blanket of big tech, with the Nasdaq outperforming overnight. Although a surprise, the Initial Jobless Claims print will not be enough to derail the recovery trade based on a one-week surprise.

Asian markets are once again adopting a more cautious posture today. Geopolitics is never far from the surface, even if it is often lost in the global recovery noise. The US overnight has added 7 Chinese supercomputing firms to its export black-list, which is likely to weigh on mainland equity sentiment today.

The ongoing AstraZeneca Covid-19 saga is gathering steam and the Philippines and Australia joined countries in Europe and the United Kingdom, and elsewhere in enacting age-related restrictions on its use due to blood-clotting concerns. With export restrictions in place for the vaccine by Europe and India, the knock-on effects on vaccination schedules worldwide are becoming apparent, even considering its production problems.

That is apparent here in Indonesia, where I am sitting, and Australia and the Philippines, which rely heavily on the vaccine for future plans. China and India are also facing challenges with vaccination schedules, and although all is rosy with the United States and British poster children, the picture is cloudier elsewhere. The potentially lengthening of the global recovery and the reopening of borders on vaccine delays and safety issues seems to weigh on export-dependent markets in Asia for now.

Heading into the weekend, geopolitics, like Covid-19, to some extent, are probably not being given the due respect they should. Apart from the US actions above, China continues to ramp up activity in the Taiwan Strait and the disputed Spratly Islands just of the Philippines’ coast. Reuters reports that Russian amphibious landing and artillery warships have entered the Black Sea (bordered by Ukraine) for “exercises.” Taken in conjunction with Russia’s build-up of land forces on Ukraine’s eastern border, Ukraine is rightly nervous, and so should Europe be. Holding gold into the weekend may be no bad thing.

In Asia today, China has just released March CPI and PPI YoY. Both data points coming in above market expectations at 0.40% and 4.40%, respectively. Fuel and transportation costs lifted the CPI number, while factory gate prices, raw materials, and energy lifted the PPI. The rise in oil prices and raw materials is clearly feeding into the China value chain now and points to an upward trajectory globally as a result. That appears to be weighing, along with geopolitics, on mainland markets today as fears increase that the PBOC will tighten monetary conditions.

In Australia, the RBA Stability Review noted that it was closely watching surging property prices, although it felt bank lending standards remain robust. With New Zealand returning to pre-Covid macroprudential standards and enacting new property price control measures, concerns are rising that Australia could follow suit. Unsurprisingly, bank stocks are weighing on Australian stock markets today even as the resource sector surges.

The rest of the day’s calendar through Asia and Europe is second-tier. The US releases PPI and Core PPI data this evening. Although both will jump higher, and on-message Jerome Powell and risk-seeking sentiment mean an abrupt change of direction is unlikely into the week’s end. Only blowout numbers to the upside, and surging US Treasury yields would do that. Conversely, lower prints are like to turbocharge the FOMO buy-everything gnomes into the session’s close.

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