Its Fed day and here's your Play - Morning Express
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Featuring views and opinions written by market professionals, not staff journalists.
It is Fed Day, the committee’s policy decision, economic outlook, and interest rate projections are due at 1:00 pm CT. Yields of longer-duration Treasuries are climbing as many analysts say a dovish Fed is simply not enough anymore. Although inflation has not shown up via headline economic indicators, it certainly has arrived. We have pointed to it here many times over; the price of Lumber has doubled to a record, prices across the energy space are at the highest level since 2018, and many agriculture commodities are at multi-year highs. The committee’s steadfast notion that there is no inflation and any sign of such will be transitory has suppressed short-term rates but lifted the ceiling farther out the curve. A melting pot of the notion that such unprecedented levels of accommodative policy will eventually create massive inflation, the aforementioned real price inflation in commodities right now, an increase in economic activity due to reopenings, and massive debt printing has cratered the bond market. As we have pointed to many times before, such an increase in rates will force investors to choose from risk-free returns or expensive stocks. The Fed’s handling of this melting pot today will be critical.
The committee can stay the course and remain dovish, but simply saying they will allow inflation to run hot won’t be enough to control the long end of the curve. If reiterating their accommodative stance until full employment is their only course of action, they must emphasize underemployment levels, deflecting from the headline U-3 number. As of February, U-3 is 6.2% versus a U-6 of 11.1%. Furthermore, it is no secret that without fiscal measures from Washington in December and again last week, the jobs picture had quickly deteriorated. Reopenings certainly will help, but there are parts of the job market that will not return, ever.
You may have seen the acronym SLR this week. It stands for Supplementary Leverage Ratio and refers to the amount of equity a bank must hold relative to their leveraged exposure. During tightened cash conditions, the Fed has relaxed SLR calculations to exempt U.S. Treasuries. At the onset of the pandemic, exempting U.S. Treasuries allowed banks to hold more leverage, so to speak, this demand supported the Treasury complex and thus suppressed rates. The deadline for this exemption is March 31st, but the Fed could address extending it today.
Last, but certainly not least is yield curve control. You may have heard someone point to Operation Twist, we have here. This was implemented by the Fed initially in 1961 and then again in 2011. Here, the Fed sells shorter-dated Treasuries and buys farther down the curve. The result is an artificial flattening of the yield curve; 2-year Note yields inch higher ever so slightly and 30-year Bond yields fall to a larger degree. The Fed is currently buying bonds at a pace of $120 billion per month, extending the duration of these purchases will support risk assets. If you would like to be up to date on the developments of our specific strategies in the futures and commodities markets, please register for a Free two-week trial by clicking on the link here: The Blue Line Express Two-Week Free Trial Sign up.
Gold (April) / Silver (May)
Gold, yesterday’s close: Settled at 1730.9, up 1.7
Silver, yesterday’s close: Settled at 26.003, down 0.285
Fundamentals: Today’s Fed meeting is front and center. A continued rise in Bonds and/or U.S. Dollar strength will pressure Gold and Silver. Shifts in policy or communication as detailed in the S&P section could and should support the metals complex.
Technicals: Both Gold and Silver continue to flirt with major three-star resistances at 1727.5-1732.9 and 25.97-26.23. Over the last four sessions, price action has been steady at and just below these levels for the most part; we must see a close above here in order to invite added buying that would take Gold to 1757.4-1761 and Silver to 27.08-27.34. There certainly have been rally attempts for each, but never a truly coordinated push and each attempt has been slammed by selling. Given such a stagnant trade, our momentum indicators align with those major three-star resistance levels. To the downside, first key supports have battled to hold waves of selling in a constructive manner, but none of that matters if price action cannot clear resistance. We remain upbeat in that if such does fail, the downside is limited; the sellers have already sold.
Resistance: 1727.5-1732.9***, 1744**, 1757.4-1761****
Support: 1719.8-1721**, 1705.6**, 1698**, 1688-1690**, 1671-1680***
Resistance: 25.97-26.23***, 26.54-26.67**, 27.08-27.34***
Support: 25.85**, 25.40-24.51**, 24.77-25.00***