Yesterday we addressed what is perhaps the most important issue for markets, namely when will the Fed taper, prompted by some unexpected "optimism" by Philly Fed president Harker who said “I could see, potentially, that occurring at the very end of 2021 or early 2022" although he quick caveated that "it is all going to depend on the course of the economy, which will depend on the course of the virus." He also admitted that this tapering "could cause disruption in the markets if we try to do it too soon,” adding that as a result “I have many degrees of caution on this, to just be steady as she goes until we start to really see the economy healing."
He was referring to the infamous taper tantrum in 2013 when Bernanke announced the end of QE3, which resulted in a dramatic pullback in 10Y yields over the next few months.
In an opinion released almost concurrently, Goldman was far more realistic, and in its revised outlook on the economy following the Georgia Blue Sweep, said that it expects tapering to begin no earlier than 2022 and no rate hikes until 2025.
Well, with the nominal 10Y yield creeping ever higher, and hitting 1.12% this morning...
... Fed Vice Chair Clarida spoke with his remarks to the Council on Foreign Relations during a presentation Friday closely watched given the recent moves in Treasuries and speculation about the FOMC future path.
In his "cautiously optimistic" prepared remarks, which can be accessed here, he said that "while the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished."
What was more notable were his comments on tapering: Clarida said that his "economic outlook is consistent with us keeping the current pace of purchases throughout the rest of this year."
He also said that "it could be quite some time before we would think about tapering the pace of our purchases the way I look at the data, and I’m relatively optimistic about the economic outlook,” in a session moderated by CNBC’s Steve Liesman. “We want further progress in the labor market and moving toward our 2% inflation objective, and I think that’s some ways away before we declare victory on that.”
He added that "right now, I think maintaining the current pace of purchases throughout the remainder of this year is my expectation,” and that the time to slow the pace of bond buying is "well down the road".
While this confirms the Goldman view that the Fed will remain accommodative this year, which is bearish USD, the bigger reaction is seen in rates, with the 10y now up +4bps, as the ominous rise continues even with a 2021 taper clearly taken off the books.
As a reminder, the Fed is buying $120 billion in month, split between a minimum $80 billion in Treasurys and $40 billion in mortgage-backed securities. The pace of purchases has accelerated through the Covid-19 pandemic as a continuing effort both to maintain economic growth and market functioning.
The continued levitation in rates could perhaps be ascribed to his other comments which were more hawkish: he said that by summer, vaccines should allow the economy to move past the pandemic, noting that he expects the economy to deliver impressive performance this year. He also notes that the level of rates is not a concern to him, though they have to take into account why yields are rising.
In short, bond bulls got no help from the Fed vice chair who seems unimpressed with the recent surge in yields...
- *CLARIDA: NOT CONCERNED BY 10-YEAR YIELDS A TOUCH ABOVE 1%
- *CLARIDA: RATES AT THESE LEVELS ARE NOT A CONCERN FOR ME
- *CLARIDA: HAVE TO TAKE INTO ACCOUNT WHY YIELDS ARE RISING
- *CLARIDA: NO CURRENT NEED TO ADJUST MATURITIES OF BOND BUYING
... although should the slump in Treasury accelerate and should CTAs actively begin to short - which they are likely doing now that the 10Y yield is above 1.10% - sending yields sharply and rapidly higher as discussed yesterday...
... expect the Fed to quickly unleash yield curve control to avoid a market crash.
Clarida also address the continued slump in the dollar - which as we noted earlier is one of the biggest consensus trades as we enter 2021 and should the bearish dollar sentiment reverse there could be a major market correction - saying that "what you basically see with broad measures of the dollar is that its level now is just a bit below its average level over the last five years." He added that ”broadly speaking, the dollar is more or less in a range that it’s been in for the last five years and it’s not something that causes me any concern right now."