Powell outlines policy normalisation plan

• Federal Reserve Chair Jerome Powell spoke yesterday, and alongside fairly wide ranging comments – including his view that crypto coins are ‘vehicles for speculation’ – he outlined a vague plan for the normalisation of monetary policy from the current ultra-loose stance. In short, he proposes tapering asset purchases ‘well before’ there is any upward move on interest rates. Powell and other Fed officials have made a number of statements in recent weeks pushing back against the prospect of sooner-than-signposted rate hikes, especially in the context of the CPI print this week this rose to 2.6% y/y.
• Industrial production in the Eurozone fell -1.0% in February, beating expectations of a -1.3% decline. While this was a deterioration compared to the 0.8% growth realised in January, this came as little surprise amidst the renewed lockdowns in a number of key economies within the single block that month. Aside from the ongoing direct effect of the Covid-19 and its related restrictions, the bloc’s production was also likely weighed down by the global semiconductor shortage as car production fell sharply across the region. The Eurozone has seen a weak start to the year, and with its vaccination programme still beset by problems the second quarter has likely got off to a slow start as well. The European Union yesterday announced that it would delay the rollout of the Johnson & Johnson vaccine following reports of rare blood clots, which follows a similar development with the AstraZeneca jab.
• In light of the worsening outlook in the Eurozone, the IMF called for further fiscal spending from the currency union over 2021-2022 if it is to avoid some long-term scarring from the Covid-19 crisis. The Fund’s regional report claims that an additional stimulus equivalent to 3% of GDP could boost output by 2%.

Today’s Economic Data and Events

15:00 Turkey one-week repo rate, %: forecast 19.00%

16:30 US initial jobless claims, April 10: forecast 700,000

16:30 US retail sales, % m/m, March: forecast 5.8%

17:15 US industrial production, % m/m, March: forecast 2.5%

Fixed income

• US Treasuries drifted lower overnight as market attention was captivated by the IPO of cryptocurrency exchange Coinbase. Federal Reserve chair Jerome Powell outlined how the bank would eventually begin to normalize policy in comments to the Economic Club, saying that tapering of QE would come “well before” any rate increases.
• Market moves were generally limited with yields on the 2yr UST rising marginally to 0.161% and 10yr yields adding less than 2bps to settle at 1.6323%. Elsewhere bond markets were generally lower with yields up 3bps on 10yr bunds at -0.26%, a gain of more than 2bps on gilts at 0.80% and a 3bps increase in French bonds to -0.003%.
• Emerging market bonds though were stronger. Both South African and Turkish bonds gained with yields falling 12bps and 22bps respectively.
• In rating action, Fitch assigned Saudi Real Estate Refinance an ‘A’ rating with a negative outlook while S&P revised its outlook on Commercial Bank of Qatar to positive and affirmed the rating at ‘BBB+’.

FX

• The dollar fell for a third day in a row overnight and is starting on the back foot this morning. The broad DXY index was off by 0.18% overnight at 91.69 with EURUSD adding almost 0.3% to close just shy of 1.20. USDJPY fell back below 109 and is pushing lower in early trade today.
• Commodity currencies received a boost as well as raw materials got a boost. AUD and NZD were the big gainers, with gains of more than 1% each while USDCAD fell by a more modest 0.11% to 1.2521.

Equities

• In the US, the S&P 500 and the NASDAQ both sold off yesterday after reaching record highs earlier in the week, losing -0.5% and -1.0% respectively. The Dow Jones by contrast gained 0.2%.
• The UK’s FTSE 100 was the big gainer in Europe yesterday, closing up 0.7%. Travel and consumer firms are benefitting from the ongoing easing of lockdown which took another step earlier this week.
• Within the region the Tadawul gained 0.1% and the DFM closed 0.2% higher. In Egypt, the EGX 30 lost -2.0%.

Commodities

• Oil prices rallied almost 5% across all the major benchmarks, helped by an improving demand outlook outlined by the IEA in its latest monthly report. Brent futures closed at USD 66.58/b, a gain of 4.6%, WTI rallied 4.9% to USD 63.15/b while Murban hit USD 65.39/b, up 4.7% and its highest daily close since it began trading at the end of March.
• The IEA revised up its demand forecast for 2021 with most of the gains coming in the US. That will be welcome news to OPEC+ producers who are in the process of raising output for the three months from May to July. In the US, crude inventories fell almost 7m bbl along with draws in both kerosene and distillates. Those draws more than outweighed a modest build in gasoline stocks and total petroleum inventories fell by 10m bbl last week. US crude production gained 100k b/d to 11m b/d while product supplied rose above 20m b/d.
• Diplomatic tensions between Iran and the US are rising again as Iran has increased its enrichment of uranium fuel, just as negotiations for a potential US return to the JCPOA have begun. We had been discounting the impact of Iranian oil coming back to markets in a significant way this year in any case but escalating tensions could add more of a bid under oil in the near term.

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