Markets
European markets took a breather yesterday following two days of reflation action. US investors missed out on the party on Monday due to US President’s Day, but made up for their absence during US dealings. Another big sell-off in US Treasuries lasted until the closing bell. US yields including Monday’s catch-up added 1 bp to 10.5 bps with the belly of the curve (7y-10y) underperforming. The US 10y yield immediately waved goodbye to the March liquidity squeeze top (1.27%), settling above 1.30%. Next key resistance stands at 1.43% which is both the 2019 bottom and 38% retracement of the 2018-2020 yield decline. Interestingly, details showed a remarkable increase of US real yields whereas inflation expectations responsible for the lion share of the US yield increase so far plateaued. The key question is whether this reflects a more positive assessment on growth with UK PM Johnson’s remarks to ready an end to lockdown life working as an harbinger for the rest of the world or whether markets discount a sooner return to normal by the Fed to address inflation risks. The Fed fund future curve in any case shows only a very modest rise between now and the end of 2022. The focus will first turn to the pace of the US central bank’s asset purchase programme. A genie, Powell only recently tried to put in the bottle. The bond sell-off currently occurs on a global level. The German yield curve bear steepened with yields rising by 0.6 bps (2y) to 4.1 bps (30y). The German 10y yield arrived at -0.34% resistance (38% retracement of March/November decline) with the EU 10y swap rate near the psychologic 0% mark. 10-yr yield spread changes vs Germany barely changed.
The pace of the action on bond markets serves as a wake-up call for other reflation beneficiaries. The stock market is a point in case. Main European and US markets stabilized near recent highs yesterday. The rapid steepening at least suggests some rotation with Q4 2018 serving as a reminder of what can happen when a Fed policy reversal comes into play. We admit that (absolute) yields currently are nowhere near where they were back then, but it goes the other way around to equity levels. The dollar’s performance was disappointing with the greenback only slightly profiting from a >10 bps increase in real yields to the highest level since November. EUR/USD closed at 1.2106 compared to an 1.2129 open and a failed test of intermediate resistance (1.2151) in between. The greenback does take the upper hand this morning. Core bonds stabilize near weakest levels with main Asian indices around 0.5% lower. It’s probably too soon to call an end to the bond sell-off. If carried by higher real yields we think it should ultimately benefit the dollar, especially in case of doubt on equity markets. Today’s eco calendar contains US retail sales. Of late, markets for the first time in a while tended to react to positive surprises switching the asymmetric risk.
News Headlines
The IMF hailed Canada’s Covid-19 response in a report yesterday but warned that the crisis has exposed some cracks in its social safety net and that the country should set clear fiscal targets before committing to new significant spending. Canada’s plans to spend up to 4% of GDP over the next three years to support the recovery should come with proper justification, or it could weaken the fiscal framework’s credibility, the IMF concluded.
Dozens of German business lobbies have criticized the government for not having laid out a plan to unwind closures of hotels, restaurants and other stores at a crucial gathering last week. Economy Minister Altmaier said he would construct a proposal for easing the lockdown measures that is to be discussed at a meeting between Merkel and Germany’s state leaders on March 3. Altmaier will also create a so-called hardship fund of about €1.5bn to act as a backstop for cases where other programs don’t function properly in distributing financial aid.
Japanese exports rose a strong 6.4% y/y in January, driven by a surge in chip-making gear and shipments of plastics. Exports to China rose the most since 2010 (37.5%), in part due to the timing of Lunar New Year. Japanese imports fell a more-than-expected 9.5% y/y, keeping the trade balance surplus near recent highs.
