Although several major markets are still closed today due to the Easter weekend (Australia, UK, Europe, Hong Kong), the markets that are open are offering their reaction to this past Friday’s bumper US non-farm payrolls report. The US economy added 916,000 jobs in March, which far exceeded economists’ expectations for 660,000. The US unemployment rate has now dropped to 6%, compared to 6.2% in the month prior.

This stellar piece of economic data justifies investors’ optimism surrounding the US economic recovery, which is set to further encourage the reflation trade.

Asian stocks are in the green with Japan’s Nikkei 225 gaining by more than one percent at the open. US equity futures are climbing as well, which potentially paves the way for a new record high for the Dow Jones index and the S&P 500. Note that the latter index closed above the psychologically-important 4,000 mark for the first time in history before the long Easter weekend.

Once that stellar NFP print has been digested, global investors will have more key economic data and market events to ponder upon over the coming days:

Monday, April 5:

• IMF and World Bank spring meetings begin
• US factory orders

Tuesday, April 6:

• RBA policy decision
• China Caixin services PMI
• Eurozone unemployment
• IMF releases updated World Economic Outlook
• US Treasury Secretary Janet Yellen to speak on IMF spring meeting panel

Wednesday, April 7:

• FOMC meeting minutes
• Fed speak: Chicago Fed President Charles Evans, Dallas Fed President Robert Kaplan
• Eurozone services PMI

Thursday, April 8:

• Fed Chair Jerome Powell to speak on IMF spring meeting panel
• Fed speak: St. Louis Fed President James Bullard, Minneapolis Fed President Neel Kashkari
• ECB meeting minutes
• Germany factory orders

Markets to keep fighting the Fed?

10-year Treasury yields are now trading about 10-basis points higher compared to levels around the FOMC’s last meeting on March 16-17. With every basis point it climbs, it potentially lowers the bar for the Federal Reserve to intervene.

If or when the Fed decides to bat down Treasury yields, such an act may trigger a massive bout of volatility across broad asset classes.

With so much at stake, investors and traders are expected to pay close attention to this week’s commentary out of Fed officials, including the Fed Chair himself, along with the Wednesday release of the FOMC March meeting minutes. The meeting minutes could help offer more insights into policymakers’ views surrounding US inflation, and their biases as to how the Fed should eventually respond. As things stand, benchmark interest rates remain near zero while the central bank continues lapping up $120 billion in bonds per month to help support financial markets.

Fed Chair Powell has long iterated that the US economy remains a long way from a full recovery and that the central bank doesn’t yet see a need to tamper down rocketing Treasury yields.

It remains to be seen whether Powell, and the other Fed officials, might tweak their tune this week following the latest jobs report. The slightest suggestion that the Fed is ready to curb the surge in Treasury yields, or that they are more comfortable raising interest rates sooner than later, may unwind some of the dollar’s recent gains.

Dollar defiant

The US dollar has received a boost this year from surging Treasury yields, defying market expectations for a weaker greenback in 2021. The dollar index (DXY) has instead gained by 3.33% so far this year, though it has moderated below the psychologically-important 93 mark as yields soften at the time of writing.

From a technical perspective, the DXY’s 50-day simple moving average crossed above its 100-day counterpart on 26 March, with the index then adding about 0.2% since forming that ‘golden cross’. And with its 14-day relative strength index pulling away from overbought levels, coupled with the momentum indicator that still rings bullish, the DXY may now have line of sight of the November high of 94.31 sometime in Q2.

Such an upward trajectory for the greenback assumes that the Fed will still tolerate higher Treasury yields, while the US economic recovery and its vaccination efforts can continue at a faster clip compared to Europe, noting that the euro currency accounts for 57.6% of the DXY.

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