Markets
Core bonds ended a fertile week on a very volatile note last Friday. US Treasuries underperformed significantly. US factory inflation (PPI) in February surged to the fastest pace since 2018/early 2019, adding evidence to the inflation narrative. U. of Michigan consumer confidence beat expectations by quite a margin. Along with the steamrolling vaccination campaign and latest $1.9tn fiscal shot, American (real) yields jumped 2.2 bps (3-yr) to about 9 bps at the long end, pushing the 10-yr yield beyond previous recovery highs to 1.62%. The 30-yr touched resistance near 2.40%. The German yield curve also bear steepened, erasing all (and more) of the post-ECB decline. Yields ended 2.8 bps (10-yr, near -0.30%) to 4 bps (30-yr) higher. The bond rout caused a further yet modest equity sector rotation from tech (Nasdaq -0.59%) to cyclicals (DJI +0.90%, new record). The dollar gained broadly with gains most pronounced against the Japanese yen (USD/JPY closed just north of 109, up from 108.51). EUR/USD slipped from the 1.198 area to 1.191 before cutting losses. The couple eventually finished near the 1.1952 technical reference. EUR/GBP trading was mainly a GBP/USD derivative. The pair jumped from the 0.855 support area to 0.859.
Asian stock markets trade mixed, following a similar performance on WS. China underperforms after an extremely difficult-to-interpret batch of February year-on-year figures (industrial production 35.1%, retail sales 33.8%). Core bonds’ early gains fade. 10-yr yields down under soar 8.7 bps and 11 bps even in New Zealand. USD trades solid, extending Friday’s gains against most peers. EUR/USD (1.1929) slips below 1.1952 support. USD/JPY extends gains north of 109. The Chinese yuan dips (USD/CNY 6.508).
In today’s economic calendar, only the US Empire manufacturing is worth mentioning. Direct market impact is probably limited given the backloaded nature of this week’s events. Tomorrow’s US retail sales and especially Wednesday’s Fed policy meeting are the main eyecatchers. The Fed’s view for now is that higher US yields are mainly a reflection of economic optimism. We suspect (rate) markets will continue to trade this narrative going into the meeting, testing the central bank’s tolerance level. Even if that would prompt a pushback by Powell, we believe the impact will be temporary. Markets in our view are past the stage of verbal interventions. We’re eyeballing the 30-yr yield and the 2.4% resistance level in particular. Higher yields should support the dollar although Friday’s performance was rather disappointing. We assume the EUR/USD 1.19 support area to hold. Sterling is playing the waiting game. Some minor softness in the run-up to the Bank of England on Thursday might keep EUR/GBP in check. From a technical point of view, the pound still holds the advantage.
News Headlines
German Chancellor Merkel’s CDU party suffered big defeats in two regional elections yesterday. The CDU is projected to only get 23% of the votes in Baden -Wuerttemberg where greens are maintaining their lead. In Rhineland-Palatinate the CDU will be second with 27% after the Social democrats. Both results were the worst since World War II for Christian Democratic Party. The regional elections come only six months before national elections on September 26. The results question the position of CDU leader Armin Laschet to become the party’s candidate for chancellorship in the upcoming general elections.
RBA governor Lowe in a speech overnight said that investment in Australia’s digital capacities is crucial to lifting the country’s productive capacity and underpinning future prosperity. At the same time, the RBA governor indicated that business investment is one part of the economic recovery that has yet to click into gear. This supports the case for the RBA to continue an accommodative monetary policy. With respect to the labour market, Lowe indicated that while Australia is doing better than most advanced economies, an employment rate of 6.4% (January) is too high and that the economy is still operating well short of its capacity.
