| More vaccines for the U.S., tame inflation calms markets, and a regulatory regime change on Wall Street. Vaccine nationalism The gap between the vaccine haves and have-not nations is set to widen after Joe Biden doubled the U.S. order of Johnson & Johnson's single-shot treatment. The U.S. president faces a tough balancing act of meeting domestic needs and sharing with more needy allies. For now Biden said he needs to put Americans first while acknowledging that no one is safe until everyone is. Moderna Inc. has said its U.S. production is entirely for domestic use. Pfizer Inc. and J&J have declined to say whether they've exported any U.S.-produced doses or plan to. Meanwhile, Europe's slow vaccine take-up is causing investor alarm and outflows. Rate reprieve Inflation fears are easing after a key measure of U.S. consumer prices rose less than expected in February. That's been enough to keep 10-year benchmark yields steady around 1.5% and boost beaten-up tech stocks. A final auction hurdle will be today's $24 billion Treasury issuance of 30-year bonds. Another test for the bond market will be jobless claims due at 8:30 a.m., which are forecast to show the number of new weekly claimants dropped 20,000 to 725,000. New sheriffBiden's pick to serve as the Treasury's undersecretary for domestic finance, Nellie Liang, is poised to undo years of deregulation under the Trump administration, according to people familiar with the matter. Her ability to pursue a regulatory agenda before her formal nomination is unlikely to be hindered because no one has formally occupied the role since 2014. As an economist at the Federal Reserve, Liang founded the division of financial stability and was a top official during Janet Yellen's tenure as chair. Meanwhile, Biden is ready to sign the $1.9 trillion Covid-19 relief bill after its passage by the House Wednesday. Markets greenOvernight the MSCI Asia Pacific Index rose 1.3% while Japan's Topix index ended 0.3% higher. In Europe, the Stoxx 600 Index added 0.2% at 5:55 a.m. Eastern Time with tech and miners among the region's best performers. U.S. futures pointed to tech outperformance, with contracts on the Nasdaq 100 up 2%. Coming up... Beyond the initial claims data at 8:30 a.m., the ECB's latest rate decision is expected at 7:45 a.m., followed by a press conference with President Christine Lagarde. January JOLTS Job Openings are due at 10:00 a.m. The 30-year Treasury auction is slated for 1:00 p.m. Revlon Inc is among companies reporting earnings today. What we've been readingThis is what's caught our eye over the last 24 hours. - Biden Treasury pick quietly starts work to rein in Wall Street.
- Sanjeev Gupta and Greensill became their own worst enemies.
- My family's long-gone Texas land shows how Black wealth is won and lost.
- EU urges U.K. to come clean on vaccine exports in heated dispute.
- The economy looks set to roar, and that worries investors.
- Apple tilts to iPhone playbook for car.
- The very concept of dark matter is questioned.
And finally, here's what Joe's interested in this morningThe Reserve Bank of Australia has recently been pushing back against rising government bond yields, with Governor Philip Lowe indicating that the market is premature in its expectation of tightening. While global bond market volatility has calmed down over the last few days, some version of this tension has emerged throughout the developed world in recent weeks. As such, it's worth understanding the challenges the RBA is dealing with right now in executing its strategy which, like the Fed, involves waiting a long time before the next rate hike.
To grasp things better, I did a Q&A with Jon Turek of JST Advisors, who is also the author of the Cheap Convexity blog.
Q: How would you characterize the tension between Australia's central bank and its bond market right now?
JT: Ya, it's been a very interesting past few weeks for the RBA. While the RBA has met since, the February meeting was a clear turning point. The RBA not only extended asset purchases but introduced some fairly aggressive forward guidance.
The RBA statement said: "The Board will not increase the cash rate until actual inflation is sustainably within the 2% to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest."
This is fairly aggressive forward guidance, and incorporates a calendar element to strengthen the commitment. However, since the February meeting, the market has repriced dramatically, with hikes priced well before 2024 and the bond market selloff has broadened from the back-end to the belly. So there is clearly this tension between the RBA and markets, and this is something we seem to be seeing across the G10 as global yields have moved higher. I think one of the key messages in this friction is: Central banks are falling behind in how good growth is going to be. Looking at the language, the RBA still made their calendar guidance with some sort of outcome bias: "does not expect these conditions to be met." The market right now doesn't seem so interested in what central bankers think about growth rates as the market thinks they're not even in the ballpark. So, the RBA is saying it does not want lift-off until 2024 because that is the earliest their economic thresholds will kick in, but the market is saying it will be way earlier than that. This is a problem central bankers seem to be having with outcome guidance in general, the market thinks their forecasts for growth and inflation are too low so it is diluting the efficacy of the guidance.
Q: You mentioned this being a G10-wide phenomenon. How much are all of the big central banks dealing with this problem? So far it doesn't seem like the Fed has had any real concerns about the rise in bond yields. But is there a point where the Fed could find itself with the same tension the RBA is experiencing?
JT: Yes, there is this time inconsistency element between central banks that no longer want to react to forecasted outcomes -- only realized ones -- and markets that are innately discounting mechanisms. We have seen this across G10. The Bank of Canada has said that they do not expect to raise rates until 2023, but the market is pricing lift-off as a 2022 event. The Fed's median dot has the funds rate at its effective lower bound through 2023 but the market has begun to price a hike in Dec. 2022. I think one of the key issues central banks are dealing with, especially the Fed, is they want to be static in terms of their forward-guidance posture and the market is telling them they need to be more dynamic. Said in another way, the Fed wants to autopilot this new reaction function, and the market is seemingly not letting them. In terms of the Fed, nothing has really changed since the December FOMC, where they introduced balance sheet guidance and that QE would run at its current pace until there was "substantial progress" in terms of their dual mandate goals. However, since December a lot has changed in terms of the Georgia election result and the relatively rapid vaccination rollout. The Fed is saying look how consistent we've been, and the market said that is exactly the problem. Whether it is a more aggressive form of guidance like calendar guidance or continuing to use the dots as a "commitment mechanism", I think the Fed is now getting it and that will come across clearly next week. The problem the Fed and other central banks have had recently is markets are discounting their thresholds, especially for tapering asset purchases, which is so crucial in a sequencing sense. So I expect to see more language like we saw last week from the Fed, that pushes back and adds qualifiers to "substantial progress." I.e. Last week we heard Brainard talk about "maximum inclusive employment", and Clarida talk about looking past just U3 to define "substantial progress." This is how the Fed gets back onside with the market, because the market is looking at Goldman's call for a 4 handle U3 by year-end and saying that should equal "substantial progress" and now the Fed is saying, well, maybe not. That is important language that I think has been a bit overlooked recently by the market. Q: Last question. Going back to the RBA. Is there a limit to the degree in which it can push back against global rates trends? If it really wanted to, can it cap the short end of the curve, while other G-10 peers are letting theirs rise? What would be the perceived cost of that?
JT: I think the point is, what part of the curve is the release valve for growth? Central banks are fine with letting the long-end drift higher in yield on the back of an improved economic outlook. The problem is when the belly of the bond market is the release valve for growth and that begins to threaten the central bank's goals via financial conditions. Central banks can do a lot more to better anchor the rate path, which will bring down yields in the 3-5y segments of bond markets. However, I don't think central banks are worried that things like the 30y UST yield is above 2.25%. Central banks, especially the Fed, are trying to solve the problem of r*=0. A key sign that their policy stance is working is long-end yields being the release valve for improved growth and inflation. So I think the key part of this is monitoring which part of the bond market is leading the weakness, if it's the long end that's fine and consistent with what central banks want. If it is the belly, that is concerning and should be a message of caution to central bankers and how they are enforcing their reaction function. For more, follow Jon on Twitter and check out his newsletter.
Joe Weisenthal is an editor at Bloomberg. | 
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