Has the Fed lost its power to surprise the market?
There is a bit of a contrast in narratives since overnight trading as Fed chair Powell came out to put to bed any talk of tapering for now, while US president-elect Biden unveiled a $1.9 trillion stimulus proposal to bolster the economic recovery.
Despite Powell's remarks, Treasuries sold off initially in anticipation of Biden's proposal but has since eased as we get the new day going amid some concerns that there could be a couple of roadblocks in Congress to push all of the spending through.
Meanwhile, the dollar has kept a modest advance into European trading today as we see EUR/USD now ease to 1.2118 and testing daily support from the 21 December low @ 1.2130. A break below that opens up a potential push to 1.2059-64 next.
Let's go back to the contrasting narratives between Powell and Biden to start things off.
Powell puts an end to taper talk - for now at least
In other words, Powell is largely reaffirming the status quo from the end of last year. In essence, it isn't anything new in the market as he pretty much just reminded investors that easy policy will stay in place for quite some time.
The step back by the market isn't an unfamiliar one, and that casts some doubt on the Fed being able to really surprise the market under the current circumstances.
The market got ahead of itself in looking too far out in the reflation theme but to shift gears back into the November and December mode, that's the easy part.
The hard part will be deciphering how the Fed will really react if inflation starts to creep up towards 2%. With the screws tightening, it will be a challenge of the Fed's resolve to brush all of that aside moving forward.
The Fed doesn't have a good track record of fighting back when being bullied by the market, so that is something to consider in the months or year ahead.
Biden proposal being met with some degree of skepticism
The $1.9 trillion proposal is not exactly a monumental figure but it is still a decent amount to bolster the US economy, if it does go through. And that is a very big if.
Given how the Senate has shaped up to be, even the slim "majority" that the Democrats hold will mean little, and that is an area where the market is showing concerns right now.
If Biden can't win over support in Congress to push through most of the plans in his proposal, the watered-down version is not exactly something the market will be too cheerful about. Although, it is still better than nothing at least.
What's the verdict?
Powell should have been a boost for bonds while Biden should have been a dampener but at the end of it all, we are seeing a shove lower in yields now as we get into European morning trade today.
That says that the bond market isn't entirely convinced about the stimulus boost and it may take much more for yields to really break out more meaningfully.
10-year real yields in the Treasuries space has declined back under -1% and that also reflects some degree of doubt in stimulus hopes. A sell the fact play?
Meanwhile, equities got some affirmation from Powell but stimulus doubts are casting a shadow over things ahead of the weekend.
I would still argue that the move remains for a push higher in the big picture as long as the Fed put stays in play. However, support towards Biden's proposal (or lack thereof) will be key to watch in dictating the risk narrative in the short-term as well.
As for the dollar, the slight hint of risk aversion acts as a tailwind for now and one can argue that the stimulus boost is also good as it bolsters economic prospects.
But once again, with the Fed put still in play, it is going to be tough to fight against that in the bigger picture of things. The near-term retracement could still have ways to go and that is helping to limit the slight rebound in gold and silver for the time being, but the dollar still has a lot to prove in order to change course in 1H 2021 at least.