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New challenge for the Powell Fed: A strengthening economy – Investment Executive

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At the Fed’s policy meeting this week and at a news conference to follow, the chair will take up a new challenge: convincing financial markets that even as the economic picture brightens, the Fed will be able to continue providing support without contributing to high inflation. Powell’s message will likely be that the economy still needs substantial backing from the Fed in the form of short-term interest rates near zero and bond purchases that are intended to lower long-term borrowing rates.

Complicating the Fed’s task is that investors envision a swift and robust recovery later this year that could accelerate inflation and send long-term rates surging. Behind that fear is the belief that as vaccines are more widely administered and money from President Joe Biden’s $1.9 trillion rescue package flows through the economy, growth will accelerate so fast that the Fed will feel compelled to quickly raise rates to quell inflation pressures. If that were to happen, the economy could suffer another setback.

The economy’s outlook has improved significantly since the Fed’s policymaking committee last met in late January. Job gains accelerated in February, sales at retail stores jumped after $600 relief checks were distributed at the start of the year and Biden signed his economic relief package into law last week.

The stronger outlook has sent the yield on the 10-year Treasury note climbing as investors have dumped bonds, which are typically safe-haven investments during downturns. The yield on the 10-year reached 1.62% in afternoon trading Friday; it had been below 1% at the end of last year. The rise in the 10-year yield in recent weeks “caught my attention,” Powell acknowledged last week.

In anticipation of faster growth and inflation, investors have priced in at least three Fed rate hikes by 2023 — a much earlier lift-off than the Fed itself has forecast. In December, the central bank’s policymakers collectively projected that they wouldn’t begin raising rates until at least 2024.

Seeking to reassure investors, Fed officials have said they regard the rise in the 10-year yield as a positive sign, evidence that the financial markets expect the economy to steadily strengthen. Many economists agree.

“Markets are responding to the ongoing, and accelerating, recovery,” said Lewis Alexander, an economist at the investment bank Nomura. “In many respects, the Fed is dealing with the problems of success.”

But if longer-term rates rise too high, the economy could suffer as borrowing becomes more expensive for consumers and businesses. The average rate on a 30-year fixed mortgage, for example, has topped 3% after having set a record low of 2.65% as recently as early January. Mortgage rates could price out some would-be home buyers if they go too high.

When the Fed’s meeting ends Wednesday, much attention will focus on the release of its updated economic and interest rate projections. The central bank issued its most recent projections in mid-December, before it was clear whether Congress would approve a US$900-billion rescue package or how much further federal aid Biden would manage to enact. Since then, roughly US$2.8 trillion in economic relief has been approved.

Average daily Covid infections have also dropped precipitously, and vaccinations have accelerated. As a consequence, Fed officials will likely boost their projections for economic growth for this year and for 2022, lower their estimates for unemployment and raise their expectations for inflation.

Fed officials may project economic growth this year of as much as 5%, economists say, up from their December estimate of 4.2%. After a 3.5% contraction in 2020, many private-sector analysts are forecasting growth of roughly 7% this year. That would be the fastest calendar-year U.S. expansion since 1984.

Acknowledging those improvements could make it harder for the Fed to convince financial markets that it will remain “patient” about raising rates, as Powell has stressed in recent weeks.

In his news conference, Powell will likely focus on the persistent weakness in the job market. There are 9.5 million fewer jobs than there were just before the pandemic erupted a year ago. That is more jobs than were lost in the 2008-2009 Great Recession.

The unemployment rate, at 6.2%, is far below the 14.8% peak reached last April. But Fed officials often cite an alternative measure that includes people who are out of work but aren’t looking for a job and so aren’t counted as unemployed. That figure is roughly 9.5%.

One option for Powell would be to discuss financial tools the Fed could use if longer-term rates rose so quickly that they could threaten the economy’s health. The Fed could shift more of its monthly purchases of Treasurys to longer-term securities, such as 10-year notes, while cutting back on its short-term bond buys.

Or Powell could consider buying more overall government securities, with the additional purchases focused on longer-term bonds. That’s what Christine Lagarde, president of the European Central Bank, said last week she would do.

“Financial markets are looking for action here, not words,” said Joe Brusuelas, chief economist at tax and advisory firm RSM. “Powell’s in a difficult situation.”

Brusuelas suggested that Powell might be able to allay any concerns just by mentioning the Fed’s additional tools, without having to implement them.

Some economists expect the Fed to project that its next rate hike could occur by the end of 2023, earlier than they forecast in December. That move would reflect the improved economic outlook.

But it doesn’t necessarily mean the Fed will discuss any new steps, said William English, a former senior Fed official and finance professor at the Yale School of Management.

With the economy improving, “it would be a strange thing to react to that” by taking further steps to keep rates low, he said.

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Economy

CANADA STOCKS – TSX ends flat at 19,228.03

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* The Toronto Stock Exchange’s TSX falls 0.00 percent to 19,228.03

* Leading the index were Corus Entertainment Inc <CJRb.TO​>, up 7.0%, Methanex Corp​, up 6.4%, and Canaccord Genuity Group Inc​, higher by 5.5%.

* Lagging shares were Denison Mines Corp​​, down 7.0%, Trillium Therapeutics Inc​, down 7.0%, and Nexgen Energy Ltd​, lower by 5.7%.

* On the TSX 93 issues rose and 128 fell as a 0.7-to-1 ratio favored decliners. There were 26 new highs and no new lows, with total volume of 183.7 million shares.

* The most heavily traded shares by volume were Toronto-dominion Bank, Nutrien Ltd and Organigram Holdings Inc.

* The TSX’s energy group fell 1.61 points, or 1.4%, while the financials sector climbed 0.67 points, or 0.2%.

* West Texas Intermediate crude futures fell 0.44%, or $0.26, to $59.34 a barrel. Brent crude  fell 0.24%, or $0.15, to $63.05 [O/R]

* The TSX is up 10.3% for the year.

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Canadian dollar outshines G10 peers, boosted by jobs surge

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar advanced against its broadly stronger U.S. counterpart on Friday as data showing the economy added far more jobs than expected in March offset lower oil prices, with the loonie also gaining for the week.

Canada added 303,100 jobs in March, triple analyst expectations, driven by the recovery across sectors hit by shutdowns in December and January to curb the new coronavirus.

“The Canadian economy keeps beating expectations,” said Michael Goshko, corporate risk manager at Western Union Business Solutions. “It seems like the economy is adapting to these closures and restrictions.”

Stronger-than-expected economic growth could pull forward the timing of the first interest rate hike by the Bank of Canada, Goshko said.

The central bank has signaled that its benchmark rate will stay at a record low of 0.25% until 2023. It is due to update its economic forecasts on April 21, when some analysts expect it to cut bond purchases.

The Canadian dollar was trading 0.3% higher at 1.2530 to the greenback, or 79.81 U.S. cents, the biggest gain among G10 currencies. For the week, it was also up 0.3%.

Still, speculators have cut their bullish bets on the Canadian dollar to the lowest since December, data from the U.S. Commodity Futures Trading Commission showed. As of April 6, net long positions had fallen to 2,690 contracts from 6,518 in the prior week.

The price of oil, one of Canada‘s major exports, was pressured by rising supplies from major producers. U.S. crude prices settled 0.5% lower at $59.32 a barrel, while the U.S. dollar gained ground against a basket of major currencies, supported by higher U.S. Treasury yields.

Canadian government bond yields also climbed and the curve steepened, with the 10-year up 4.1 basis points at 1.502%.

 

(Reporting by Fergal Smith; Editing by Andrea Ricci)

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Canadian dollar rebounds from one-week low ahead of jobs data

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) -The Canadian dollar strengthened against its U.S. counterpart on Thursday, recovering from a one-week low the day before, as the level of oil prices bolstered the medium-term outlook for the currency and ahead of domestic jobs data on Friday.

The Canadian dollar was trading 0.4% higher at 1.2560 to the greenback, or 79.62 U.S. cents. On Wednesday, it touched its weakest intraday level since March 31 at 1.2634.

“We have seen partial retracement from the decline over the last couple of days,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.

“With oil prices where they are – let’s call WCS still at roughly $49 a barrel – I still think CAD has room to strengthen over the medium term and even over a one-week horizon.”

Western Canadian Select (WCS), the heavy blend of oil that Canada produces, trades at a discount to the U.S. benchmark. U.S. crude futures settled 0.3% lower at $59.60 a barrel, but were up nearly 80% since last November.

The S&P 500 closed at a record high as Treasury yields fell following softer-than-anticipated labor market data, while the U.S. dollar fell to a two-week low against a basket of major currencies.

Canada‘s employment report for March, due on Friday, could offer clues on the Bank of Canada‘s policy outlook. The central bank has become more upbeat about prospects for economic growth, while some strategists expect it to cut bond purchases at its next interest rate announcement on April 21.

On a more cautious note for the economy, Ontario, Canada‘s most populous province, initiated a four-week stay-at-home order as it battles a third wave of the COVID-19 pandemic.

Canadian government bond yields were lower across a flatter curve in sympathy with U.S. Treasuries. The 10-year fell 3.3 basis points to 1.469%.

(Reporting by Fergal Smith;Editing by Alison Williams and Jonathan Oatis)

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