The Daily Update: The Week Ahead

Last week was a volatile week for bond and equity markets. This year market participants have focused on the prospect of economic recovery and positioned for a reflation trade, but this in conjunction with some technical factors triggered a rout in USTs on Thursday which also spread to equity markets. The yield on the UST 10 year hit 1.61% intraday on Thursday in a move exacerbated by a poor USD 62bn auction of 7 year UST notes and other technical factors such as convexity hedging. The long end of the UST curve recovered into Friday’s close. Over the week, the UST 10-year backed up 7bps to 1.41% and UST 30-year fared better also recovering from Thursday to end the week 1bp higher at 2.15%. The UST 5-year ended the week 15bps higher to yield 0.73% and the 5s30s spread tightened 14bps to 142bps having reached 163bps on Wednesday. This backdrop triggered some selling across equity markets: the S&P 500 and NASDAQ indices fell 2.45% and 4.92% respectively.

Jerome Powell spoke on both Tuesday and Wednesday in his semi-annual testimonies to the Senate Banking and House Financial Services Committees: he continued to emphasize the need for maintaining fiscal stimulus whilst downplaying inflation concerns. Clearly, his comments this week will be monitored. Christine Lagarde noted on Monday that “Within the broad-based set of indicators that we monitor to assess whether financing conditions are still favorable, risk-free overnight indexed swap rates and sovereign yields are particularly important”. The ECB’s Chief Economist Philippe Lane added to this on Thursday stating the ECB is “closely monitoring the evolution of longer-term nominal bond yields” and that they stand ready to use the PEPP facility if required: “We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.”

Economic data points broadly supported an improved US economy: personal income rose 10% in January, the second largest increase on record, due to pandemic relief payments. Personal expenditure for January registered robust growth of 2.4%, the first increase in 3 months. The PCE deflator for January still pointed to a benign inflation backdrop registering a 1.5% yoy gain, slightly ahead of expectations of 1.4% yoy. Durable goods orders also came in ahead of expectations: the headline figure registered 3.4% mom in January and durable goods ex transportation registered 1.4% mom. However, the rise in bond yields is feeding through into higher mortgage rates and mortgage applications hit a 9 month low last week.

In the week ahead and following last week’s market moves, central bank speakers’ commentaries and the RBA meeting is likely to be a key focus. The RBA is due to meet on Tuesday and with the recent rout in bond markets the focus will be on any policy changes particularly in terms of its 3 year bond yield target of 0.1% after it undertook unscheduled purchases on Friday when yields rose above the target. Jerome Powell is due to appear on Thursday: his comments will be a focus given last week’s moves in bond markets. Other Fed speakers appearing this week include John Williams, Raphael Bostic, Loretta Mester, Neel Kashkari, Lael Brainard, Mary Daly, Patrick Harker, Charles Evans. ECB speakers include Luis de Guindos, Fabio Panetta and Isabel Schnabel. BoE speaker Silvana Tenreyro is also due to appear in a webinar discussion on negative rates. Progress of Biden’s USD 1.9tn aid package in the Senate will also be closely watched: At the end of the week the US House of Representatives passed the USD1.9tn aid package and President Biden called on the Senate to act quickly to pass the legislation. However, in another development the Senate Parliamentarian ruled that the Bill cannot include the USD15 per hour minimum wage if the bill is to be passed in the Senate using the budget reconciliation process.

Economic data-wise, US non-farm payroll data for February (released Friday) will be the key focus with the Bloomberg survey median looking for an increase of 180,000 jobs. Other US data releases over the week include the US February ISM manufacturing and services gauges which are due out on Monday and Wednesday respectively. Plus, the Fed Beige Book survey is due on Wednesday. There is also a slew of final readings of the February Markit Manufacturing PMI data for the Eurozone, UK and US. The PMI data for China has already come out showing the official manufacturing PMI reading for February below expectations slowing to 50.6 from 51.3 in January and the non-manufacturing reading also was below expectations slowing to 51.4 from 52.4 in January. The Caixin manufacturing PMI reading for February also came in below expectations at 50.9. The Caixin services PMI gauge is due for release on Wednesday. China’s NPC meeting is also due to take place this week to approve the next 5 year plan.

Elsewhere, the Eurozone flash CPI reading for February is due on Tuesday and expected to register 0.9% yoy on the headline rate similar to January where it showed a positive reading of 0.9% yoy after falling in the 5 previous months. The core rate is expected to ease to 1.1% yoy from the January reading of 1.4% yoy. In the UK, the focus will be on the budget due for release on Wednesday. The Chancellor Rishi Sunak is expected to announce continued support measures until the economy reopens but this will likely come with a warning that tax rises will be needed in the future to put the finances back on a stable footing.