US equities rose again Tuesday, S&P up 0.5%. Nasdaq closed at a fresh record high. US10Y yields 3bps lower to 1.46%, and 2yr yields lower, down 3bps to 0.23%.

Powell held to the transitory inflation mantra in his testimony Q&A overnight: "perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy." Still, a qualification: the effects have been "larger than expected. and may turn out to be more persistent."

Dovish comments from the Fed's usually hawkish Mester (voter next year): "not at a point to dial back accommodation," wants to see data over the US summer before deciding on tapering. Also, another hint at some Fed hand-wringing about last week's market reaction: "must make sure Fed communications don't add to market volatility."

Meanwhile, Fed's Daly (dovish) suggested tapering thresholds could be reached by late 2021/early 2022. Like Mester, seeking more clarity on the economy over the US summer.

In a Bloomberg interview, New York Fed President Williams seems to be an attempt to calm markets by noting that rate hikes are "still way off in the future" and that "right now...the attention is on the taper". 

Overall, The Fed speakers on Tuesday, including John Williams, Mary Daly, and Loretta Mester, are trying to maintain dovish tones saying tapering is not ready yet and rate lift-off is still a way off. It seems this is a clear response to the hawkish speeches from James Bullard and Robert Kaplan on Monday. I expect the Fed to continue reiterating the upside risks of near-term inflation but de-emphasizing the dot plots. I think the FOMC has been uncomfortable with recent market moves and is softly trying to push back from my chair.

Following last week's hawkish pivot by the FOMC, many investors have questioned whether the Fed has abandoned its flexible average inflation targeting (FAIT) strategy. While last week's market washout is understandable given the surprise shift, I suggest the previous week's events are consistent with what AIT would imply. 

Selectively I continue to like USDCAD (Trade suggesting on Monday) lower but looking ahead, and maybe risk management proclivities could dominate as we enter the summer doldrums with traders biased to maintaining a hawkish Fed view until upside inflation risks have subsided and verification of the transitory story.

So, if upside inflation risks subside and the Fed's transitory story is verified, they may once again be able to shift in a more dovish direction, putting greater emphasis on returning to the pre-pandemic labor market. Many on the street believe this reverse pivot could be supported by turnover at the Board as President Biden makes his appointments.

Bloomberg reports that Russian officials are considering proposing an OPEC+ production increase. 

After de-linking from the wobble in equity markets at the end of last week, crude oil prices have had a solid start to the week with banks, trading houses, and consultants forecasting $100/bbl oil.

Oil continues to find support from a combination of positive demand data and reduced optimism on a positive near-term outcome to Iran's nuclear talks.

Brent briefly crossed through $75/b this week, for the first time since early 2019, and sentiment seems more concerned with the path to $80/b and above than with potential downside risks. However, Bloomberg reports that Russian officials are considering proposing an OPEC+ production increase when the group meets next week, citing tighter markets and a high oil price as justification; we could see some profit-taking ahead of the OPEC meeting.

With oil at a multi-year high, I would surmise the Russian proposal might find some traction from OPEC members who are eager to capitalize from higher oil prices and to prevent an overheating that might begin to prompt concerns about demand destruction.