Investors will generally read what they want to read in any US Federal Reserve messaging from the top, and folks that write about this stuff will likely have a slightly different spin.
But with US stocks charging back from overnight lows to finish higher into the close and a welcome reprieve on the recent bond sell-off with US10Y yields unchanged at 1.36%, it suggests a job well done by Chair Powell and importantly, for now, the Fed credibility remains intact.
In my view, his success was striking a balanced tone. Too dovish, and the Chair risked exacerbating near-term inflation concerns, and too hawkish of a lean and the street will increasingly price a withdrawal in liquidity.
So overall, the balancing act seems mostly designed to keeping risk asset steering on an even keel.
However, the dynamic in risky assets versus rates haven’t magically disappeared as stocks will continue to be just as sensitive to the downside to the higher yields as the previous tech “winners” in the reflation equity rally will continue to fall under scrutiny when bond yields start rising again.
And despite some great news on vaccine and stimulus, it’s becoming increasingly apparent that the yield reaction to the reflation theme will likely be the central narrative of 2021.
In January, the Fed needed to put the taper genie back in the bottle. Now, they need to convince the short end crew to back off on aggressively repricing the short end curve by stuffing forward guidance and a perceived AIT wedge between reflation assets and rates by depressing the latter to support the former.
Oil prices hold above $61 per barrel
With excessively stretched positioning and highly susceptible to any negative news, WTI dropped towards the $61 level after the API stockpiles jumped +1.026 million barrels versus the previous draw of 5.8 million barrels during the period ended on February 19.
Although the commodity prices dropped following the bearish stockpile data, bulls probably won’t be charging back to the pen en masses as the smouldering embers around the Middle East powder keg threaten to ignite once again as the US-Iran conflict continues to simmer but at a higher heat level today.
Several banks have raised their house forecasts in response to the recent commodity strength with Long-term fundamentals suggesting post-US stimulus prices within the range between $60-$80/bbl as they did in 2019 and 2020.
The street is balloting up forecasts in reaction to the demand recovery and the draining of inventories. OPEC+ has singularly crafted an artificial deficit via the OPEC+ agreement that will help to accelerate the draw-down of global stocks, but the upside in oil is likely to be capped by the ~9mb/d of spare capacity in OPEC+ at the moment.
OPEC+ is keeping an unusually high level of spare production capacity away from the supply chain.
Still, there will likely be more visibility on their intention at the end of next week with the next round of monthly OPEC+ meetings. Outside of a rise in geopolitical risk, upside momentum could be limited in the coming days as oil traders wrestle with OPEC+ next move.