The dollar has found its feet after correcting yesterday. The DXY dollar index has settled near the 92.00 level after printing a low at 91.83 yesterday. The low was just 2 pips shy of Friday’s low.
WTI benchmark crude prices earlier hit a fresh 32-month high at $72.33 having rallied by more than 1% over the last day. Arguments that a crude supercycle is afoot remained popular, hinged on the view that major economies will be running hotter than they were in the years after the financial crisis of 2008/9, into the pandemic, and that there has been an underinvestment in oil exploration and infrastructure over the prior decade.
BoA analysts, for instance, yesterday called for oil prices (Brent) to rise above $100 into 2022, arguing that the global oil demand recovery will outpace supply growth over the next 18 months. A big focus remains on Fed and other central bank policymakers, who have by now, for the most part, collectively made a baby step in laying the groundwork for trimming back in monetary stimulus. Investors have recovered their poise this week after the shock of finding out that the Fed’s font of monetary stimulus won’t forever remain fully open.
Fed Chairman Powell will testify before Congress later today. We put Powell towards the dovish end of the 18 FOMC members, and expect him to strike a similar tone as his colleague Williams did yesterday, who said that the pick-up in the economy and inflation does not yet justify a policy shift.
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The markets will continue to assess the big market knee-jerk reactions to the shift in the Fed dots in last week’s FOMC. Worries over the FOMC’s more hawkish posture are fading with relatively dovish comments from the NY Fed’s Williams supporting.
Wall Street rallied Monday with the Dow bouncing 1.76% to reverse about half of last week’s slide. The S&P 500 climbed 1.40%, while the NASDAQ was up 0.79%. Treasuries were lower, paced by the long end as bearish curve steepening trades unwound the big curve flattening trades. The 30-year rate climbed 9.5 bps to 2.11% after testing 1.929% before the open. The 10-year cheapened 5.2 bps to 1.49%. The big 27 bp compression in the 5s-30s curve to 113 bps last week steepened back out to 120 bps.
Attention will await Chair Powell’s testimony for any additional clues on the timing of QE tapering. However, the hearing is not until 14 ET, and this is not the venue for any new thoughts on the policy stance. He will be testifying on the Fed’s covid response. He is likely to indicate that the policy path will be determined by the data on the economy, the labor market, and inflation. There is also Fedspeak from Daly, a current voter, and Mester, a 2022 voter, so their comments may prove more interesting.
For data, the calendar features May’s existing-home sales, seen slipping to a 5.750 mln pace from 5.850 mln. The June Richmond Fed index should slide to 17 from 18. The Treasury auctions $60 bln of 2-year notes.