The bond market selloff returned after President Biden signed the $1.9 trillion relief bill into law and as Americans embrace the idea of a normal summer. The US is winning the COVID fight and it seems the best-case scenarios for the economy are happening. President Biden is an experienced politician and he knows it is best to under-promise and overdeliver. Biden’s goal of July 4th to get America “closer to normal” really means that this economy is likely to run hot in June. If all Americans are eligible for a COVID-19 vaccine by May 1st, expectations will be high that most states will have already lifted their COVID restrictions.
Prior to today, bond yields appeared to be stabilizing and many analysts were expecting next week to be an easy FOMC policy meeting that was going to deliver much of the same rhetoric from Fed Chair Powell. If the bond market selloff intensifies leading up to the March 17th FOMC decision, the Fed may finally have to push back against the move in Treasury yields. The Fed has clearly stuck to the script that tighter financial conditions or disorderly markets would warrant action and if yields maintain a skyrocketing trajectory, they will become more vocal.
Risk aversion Friday is sending US stocks lower, with the Nasdaq bearing the brunt of the decline as Treasury yields soar. Hurting the Nasdaq was also the news that Tencent was beginning to face tougher scrutiny from China’s antitrust watchdog.
US producer prices delivered another solid gain. Following last month’s best increase since 2009, producer prices increased 0.5% on a monthly basis, in-line with expectations and down from the 1.3% prior reading. The PPI Final demand year-over-year rose from 1.7% to 2.8%, the biggest increase since 2018. These readings support a modest climb in overall prices and that is why Treasury yields pushed higher following the release. Next month, will see a strong surge in producer prices due to base effects and that could bolster the argument that runaway inflation is a short-term risk.
The Canadian dollar rallied after a blockbuster jobs report showed 259,000 jobs were added in February, much more than the expected 75,000 consensus estimate. This is the first month of gains since November and supports calls for the BOC to rein in stimulus. The loonie rallied against the dollar and is approaching the strongest levels since late February. If Canada can continue to ease more COVID-19 restrictions over the next few weeks, the economy could run much hotter. The Canadian dollar has benefited from strong oil prices but could see another massive if the short-term outlook improves.
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