Markets
Core bond yields eased during Asian and European dealings yesterday, with rates at some point 5 to 6 basis points correcting lower at the long end in the US. It stopped the bleeding on stock markets as well. Enter Powell. The Fed chair vowed to keep policy very easy as it is still a long way from its full employment goal. He failed to sooth inflation fears, saying any pickup is likely temporary. The recent yield rush caught his attention but according to Powell they may be transitory as well. The chair would be more concerned about disorderly markets or a persistent tightening of financial conditions. Doing little to push back on higher long yields or rate hike expectations brought forward, disappointed bond markets sold off dramatically. US yields rebounded from near-intraday lows, bear steepening the curve with the belly underperforming the wings. Yields rose 5.8 bps (5-yr) over 7.9 bps (7-yr) to 8.2 bps (10-yr) as real yields jumped. The 10-yr yield decisively took out 1.5(6)%, the 30-yr variant rose north of 2.30%. US equity indices sunk another 2% (Nasdaq). German yields fell 1 or 2 bps, missing out on the UST action after European closing hours but paring some of the earlier losses after OPEC unexpectedly decided to extend output curbs into April. Brent oil rose more than 4% to just shy of $67/barrel. The real yield surge buoyed the US dollar. EUR/USD tanked from 1.206, giving up 1.2011 support and finishing at 1.197. USD/JPY (107.98) finished an inch away from taking out 108. Sterling remained strong in the wake of the UK budget. EUR/GBP neared but stayed north of 0.86.
Asian stocks gapped lower following WS’s performance but pare losses as the session evolves. China manages a return to the green. The country set its 2021 growth and deficit targets. FX markets trade muted, the dollar keeps a slight advantage over most G10 peers. USTs hold yesterday’s losses. Bunds recovered from gapping lower.
US payrolls are in focus today. Labour market momentum should pick up again after two dire months. The 198k consensus in our view is doable but comes with one caveat: the impact of the Arctic blast that froze large parts of the US. We mainly see upside risks in core (US) bond yields after Powell’s reluctancy to lean very much against the current wind and as the Senate kicked off the fiscal stimulus debate (expected to end in the weekend). Markets might also eye next week’s long-tenor bond supply. They may want to limit UST exposure having last week’s poor 7-yr auction, which triggered strong bond volatility, in mind. The dollar could continue to benefit from rising yields and vulnerable equity markets. A break below EUR/USD 1.1952 would deteriorate the technical picture. Next support in that case situates around 1.192. EUR/GBP tested 0.86 yesterday. Today’s comeback isn’t convincing at all and is in any case limited by the upper bound of the downward trend channel. We remain cautious on the pair.
News Headlines
At the National People’s Congress, Chinese Premier Li Keqiang said the government set a growth target of above 6% for this year. The level was on the conservative side of expectations and suggests a more cautious approach on monetary and fiscal stimulus. After a setback earlier last year, the Chinese economy still grew 2.3% in 2020. The Chinese government aims to reduce the budget deficit to 3.2% this year down from 3.6% last year.
BoJ governor Kuroda before Parliament said that it’s either necessary nor appropriate to expand the band for the target of the 10-y government bond yield. According to the governor, ‘there is no change in the importance of keeping the yield curve stable at a low level’. The comments dismiss speculation that the BoJ could widen the 0.2% band around the 0% target when finishing its policy review that is expected for March 19.
The Congressional Budget office projected the federal debt to almost double to 202% of GDP by 2051. Rising costs for healthcare and debt serve as important drivers. The CBO upwardly revised the projected growth for the next three decades from 1.6% in September to 1.8%. Growth averaged 3.1% between 1951 and 2020. For this year, Federal debt is seen at 102% of GDP. The forecast doesn’t take into account the impact of the $1.9 trillion stimulus package that is currently discussed in US Congress.
