Last week was a better week for bond markets: the UST 10 year yield tightened 4bps to 1.68%. The 10 year UST had reached a closing yield of 1.61% mid-week but softened into Friday’s close. The 5s30s spread tightened 4bps to 151bps over the week. The market also absorbed a sizeable amount of new issuance Tuesday through to Thursday: USD 60bn of 2 year notes, USD61bn of 5 year notes and USD62bn of 7-year notes. Gilts and European Government Bonds broadly traded better on the week. Equities were mixed: S&P500 ended the week +1.57% and the Nasdaq fell 0.58%: there was unusual block trade activity on Friday. Brent crude ended the week virtually unchanged at USD64.57 per barrel having bounced off Tuesday’s lows when a container ship ran aground and blocked the Suez canal, an important trade route. In emerging markets Turkey dominated the headlines: the Turkish lira, equities and bonds came under pressure following a loss of investor confidence with the removal of the Naci Agbal from the role as Central Bank Governor. The BIST-100 equity market fell 9.6% wow and the Turkish lira fell 11% versus the USD over the week (spot return): Turkey scores poorly on an NFA basis and we do not hold Turkish bonds in our portfolios.
It was a mixed week in terms of news-flow. In terms of economic recovery, President Biden held a press conference where he doubled his initial vaccination target to 200m doses in the first 100 days of office. Set against this covid infections are on the rise in Europe with further lockdown restrictions continuing to be announced compounded by vaccine tensions between the EU and UK as Europe is lacking vaccine supply and lagging behind in its vaccination programme. Nevertheless, the March Markit PMI readings for the US, UK and the Eurozone pointed to economic improvement. In the US, the March readings for manufacturing and services came in at 59 and 60, respectively. The manufacturing gauge was slightly below expectation of 59.5 but still remains strongly in expansionary territory. The Eurozone March PMI readings came in stronger than expected: the manufacturing gauge registered 62.4 versus expectations of 57.6 and services registered 48.8 against expectations of 46.
Other US data releases were mixed but weather and supply constraints have been factors impacting a number of February data releases. The Chicago Fed National Activity Index for February was much weaker than expected reflecting declines in indicators related to production, personal consumption and housing. US existing home sales fell 6.6% in February when expectations had been for a decline of 3% and February new home sales fell 18.2% mom. US durable goods order for February erred on the weaker side with capital goods for non-defence ex- aircraft declining 0.8% mom. Personal income fell 7.1% in February as the impact of stimulus cheques in the prior month eased and personal spending was down 1% with the weather a likely factor. Importantly, the inflation data remained benign: US February headline PCE inflation was in line with expectations at 1.6% yoy although the core PCE inflation figure came in slightly weaker than expected at 1.4% yoy. Janet Yellen and Jerome Powell appeared before the House Financial Services and Senate Banking committees and Jerome Powell continued to emphasise that while “We do expect inflation will move up over the course of the year,” it will be “neither particularly large nor persistent”.
In the week ahead, the start of the Easter holidays will see a number of markets shut on Friday and the following Monday. The focus is expected to be on data releases to gauge the strength of the global recovery. Despite a number of markets being shut, Friday’s US non-farm payroll data will be a key focus: hiring is expected to pick up as the loosening of restrictions and vaccine rollout take effect. The Bloomberg survey is looking for 643,000 jobs added in March compared to 379,000 jobs added last month. The other key US data releases include the Dallas Fed Manufacturing Activity index for March on Monday, the Conference Board Consumer Confidence reading for March on Tuesday and the ISM Manufacturing reading for March on Thursday. Data releases from China include the official and Caixin China PMI data releases for March on Wednesday and Thursday respectively: the Bloomberg survey is looking for an improvement from the previous month further into expansionary territory. In Japan, the Q1 Tankan Survey is due on Wednesday and the market is looking for a recovery from the Q4 large manufacturing reading of -10 to -1 in Q1 (Bloomberg survey). The preliminary reading for the Euro area CPI inflation is due for March is due on Wednesday: the Bloomberg survey looking for 1.4% yoy for the headline reading, an increase from February’s reading of 0.9% yoy, and the yoy core reading is unchanged at 1.1% yoy. The UK economy takes another gradual step forward in its reopening plan with the end of the “stay at home” restriction. There is limited news flow expected from central banks this week: the Chilean Central Bank is due to announce its decision on Tuesday. Fed speakers include Randal Quarles, John Williams and Patrick Harker. Other things to watch include: President Biden is expected to give more detail on the USD3tn infrastructure plan on Wednesday, any further sanction developments in relation to China and Xinjiang, and the OPEC+ meeting on Thursday to discuss May output levels.