EC Always Darkest Before Dawn

Yet if tapering is not the real culprit for the sharp rise in US yields this year, what is the driver? Where you start your search is what points you in the direction of the answer. In one telling, the US 10-year yield has risen by around 45 bps since the election as investors discounted greater supply and became more committed to the reflation trade, which means higher real rates and arguably a sensitivity for higher inflation.

At the same time, the price of oil has surged. The February WTI futures contract closed October near $36.5. It approached $54 a barrel before profit-taking kicked-in ahead of the weekend. Recall that at the end of last January it was around $50.50. The deflationary thrust from oil prices has ended. Inflation expectations often track significant moves in oil prices.

Asian demand, including China's apparent inventory accumulation, drove industrial metal prices higher at the end of last year. On the other hand, supply concerns following last week's disappointing report on US plantings saw corn and soy prices rise to six-to-seven-year highs, and cotton traded at a two-year high. The CRB index has risen by over 22% since the end of October.

Even the coming Treasury supply may be exaggerated by partisans. The idea from both sides is that Biden will press ahead with the Democratic control of the legislative branch to push through the rest of the $3.2 trillion bill passed by the House of Representatives last year.

However, we suspect it is more likely that Biden, judging from his disposition and what he learned from his experience with Obama, will avoid antagonizing the opposition and souring the relationship from the get-go. Instead, he is likely to find a compromise and make it bipartisan.

Biden will be inaugurated on Jan. 20. The day before, Yellen will speak at her confirmation hearings. In addition to broad economic issues, she will likely be asked about the dollar. As an economist, she recognizes that one ideally wants the currency to move in line with policy, otherwise it blunts or undermines it. At the Federal Reserve, she recognized that dollar policy is a Treasury remit. That makes it her call now.

The "strong dollar" mantra that existed before 2016 simply cannot be returned to now. A new formulation is needed to confirm that the US will not purposely seek to devalue the dollar to reduce its debt burden or for trade advantage.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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