Does The Fed Want Inflation Expectations To Rise?

If there’s one thing, the Fed wants more than anything it is a jump in inflation expectations. The Fed’s worst scenario is the reverse—inflation expectations decline, as happened with the ECB. Indeed, the current situation is an echo of the immediate aftermath of the global financial crisis when many FOMC members and academics warned of the risk of very high inflation. The Fed chair at the time, Ben Bernanke, didn’t reject those views because it suited his purpose to talk inflation higher, same goes for Chair Powell.

The lack of bid in fixed Income markets implies the recent resurgence of reflation in bond markets may not be misguided.

Banks, and miners continue to outperform as the risk-on move we saw on Friday continues, with US stimulus lifting all boats. After a week of consolidation in Europe, it feels like the path of least resistance remains higher, as calls grow more vocal for an increase in the pace of reopening and the positive implications that would have for some areas of the market.

Oil markets

hit a 13-month high in early Asia trading today. Positive developments on vaccine deployment, the US stimulus package, and evidence of a continued gradual recovery of the global economy have improved sentiment concerning the outlook for global oil demand this year. On the supply side, a winter storm in the US is reportedly causing disruptions to oil production and transport in Texas that could affect several hundred thousand production barrels.

News that an explosive-laden drone was intercepted on the way into Saudi territory has heightened perceived geopolitical risk and contributed to positive momentum also..

The focus will soon shift to the OPEC+ taking place in early March. It will be necessary for the group to continue to present a unified front and convey the impression that it is still enforcing supply discipline.

Forex

Risk sentiment is keeping the supported. Given EUR/USD positioning and higher UST yields—EUR/USD might not be the best pair to express this view in the current environment.

All the focus has been on 1.39 breaching in , but its the sneaky climb in is starting to capture the market attention. And its the first time in a while the street is taking out USD/JPY topside via both vanilla and leveraged structures.

broke through the critical support level of 14.50 as risk continues to trade well, and the dollar is softer against most EM currencies. USDZAR is 3% weaker than this time last week. Flows are tepid due to the US holiday, and there is a neutral bias to eFX venues at these levels. South Africa reports data on Wednesday, which is expected at 3.3%, but otherwise, the information is light. The first vaccine rollout in South Africa is expected this week with Johnson & Johnson (NYSE:) providing an initial 80k dose.

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