Markets
The looming Fed meeting tonight keeps markets sidelined for the time being. In all fairness, there wasn’t much else to guide trading in the run-up to Powell’s second policy meeting of the year anyway. The economic calendar only starts heating up from tomorrow onwards. Details on US president Biden’s ‘American Families Plan’ were released by the White House this morning (see headline below) but much of the content already leaked last week. Hence listless trading on European equity markets which currently show modest gains after recovering from an early morning dip. Wall Street opens with the S&P 500 setting a new all-time high. Most action on core bond markets already took place during Asian dealings with US yields building on yesterday’s rise and holding on to gains during most of the European trading hours. We do spot some bond vigor going into the US session. Yield gains fade but that could change later today for we think the bar is high for the Fed to surprise markets on the dovish side. In contrast, it will be hard for the chair not to sound optimistic given the recent batch of sometimes extremely strong data and the vaccination pace. Thus US yields’ potential for tonight is mainly to the upside. We’ll also be watching for a decision on the IOER rate as short-term US rates have been flirting with the zero lower bound lately. German yields rise 1.1 bp (5y) to 1.7 bps (10y, 30y). The German 10y yield intraday tested the end-of-February recovery high around -0.20% before paring gains to trade back at -0.23%. The European 10y swap rate even temporarily ventured north of similar resistance at 0.10%. In any case, there is clear gusto for long yields to leap higher. Peripheral yield spreads widen. Greece (+3 bps) and Italy (+4 bps) underperform.
FX markets trade relatively muted again. EUR/USD is more or less a copy paste of yesterday. The couple tested ST support near 1.206 after opening around 1.209. The trade-weighted greenback (DXY) tries to obtain the 91 barrier but is struggling to do so. The Japanese yen isn’t able to recover from yesterday’s US yield-driven whammy. USD/JPY jumped from the low 108 to 108.7 and went for a test of the 109 handle today. EUR/JPY got caught in the slipstream, surging beyond resistance around 130.5 and maintaining its position near 131.50. EUR/GBP oscillated around 0.87. There is literally nothing more to add to this.
News Headlines
The European Parliament today approved the trade deal between the EU and the UK. An overwhelming majority voted in favour (660) with only 5 against and 32 abstentions. It was the final political hurdle to legalize a trade accord which is already effective since the start of the year and ensures tariff-free trade without quotas for EU and UK-made goods. The deal includes a binding dispute settlement mechanism and the possibility for unilateral remedial measures where necessary, EC President von der Leyen warned yesterday. While the EU doesn’t intend to use them, they serve a stark warning in disputes between the EU and the UK over Northern Ireland’s status (still aligned with EU single market rules) and over vaccination supplies.
US President Biden will use a prime-time speech later today to propose a $1.8tn spending plan for family aid. It follows a $1.9tn Covid-19 relief law and is different from the $2.3tn infrastructure package that he is promoting. White House officials indicate that the proposal includes $1tn in new spending over 10 years and $800bn in tax cuts, largely extensions of the ones under the Covid-19 relief law. The package is aimed at making child care more affordable and also includes a national paid leave program to take care for loved ones under several circumstances. To pay for the package, the White House will propose raising the top income-tax rate to 39.6% from 37% and hiking the top rate on wages and capital gains for the high earners (<$1mn). The US government also aims at $700mn in revenue thanks to a significant expansion of the Internal Revenue Service.
