Central Bank Schism Appears

The ECB's Villeroy had the clearest response yet to the turmoil in the bond market. He said much of the recent rise in yields is unwarranted and that the ECB must react against it.

Those comments helped to lower eurozone sovereign yields after they earlier ticked higher on soft PEPP buying. An ECB spokesman was forced to explain that drop in QE to 12B from 17B as a technical move rather a policy signal.

The Villeroy comments also helped to spur risk assets but some of that move unwound when the Fed's Barkin took a different approach. He said that much of the recent rise in yields “seems to be” vaccine and economic optimism and called it “a natural reaction.”

Rates hit session highs after that and helped to lift USD/JPY. However the moves were largely contained to bonds and the equity market ignored yields and soared higher.

Ultimately, the tension will need a resolution and we need a response from a core FOMC member or Powell himself before the market can really run. Brainard speaks on the economic outlook at 1800 GMT and as one of the biggest FOMC doves, she is most-likely to lean against higher yields. If so, it will validate the rebounds in equities and the bounce in commodity currencies. If not – particularly if she sends a similar message to Barkin – the we could see more of the kind of turmoil we saw last week.

That kind of commentary would also put the Fed at odds with the ECB, RBA and others, who are fighting higher rates. It should help to lift the dollar against that duo and more.