Last week, USTs continued to find good investor support: a USD24bn 20 year bond auction midweek received solid support pricing at a yield of 2.144% with a bid-to-cover ratio of 2.41. Over the week, the UST 10 year yield tightened 2bps to 1.56% at Friday’s close, although it had closed Thursday at 1.54%. The 5s30s spread tightened 2bps to 142bps. Against this backdrop IG bond markets continued to trade with a better tone. The S&P 500 recovered ground on Friday but ended the week -0.13% as a combination of spiralling covid cases in India, covid outbreaks in Japan, plus reports on Biden’s tax reform proposal dampened investor sentiment.
Central bank meetings were a focus: the Bank of Canada left rates unchanged but announced it would taper weekly asset purchases as the outlook for the economy has improved. On Thursday, the ECB left interest rates unchanged and the Governing Council expects to continue asset purchases under the PEPP programme in the current quarter at “a significantly higher pace than during the first months of the year”. ECB President Christine Lagarde noted in the opening commentary the commitment to maintaining favourable financing conditions and that financing conditions recently remained “broadly stable” but that risks remain; hence the Governing Council reaffirmed its very accommodative policy stance. Lagarde noted during the Q&A session that the Governing Council “did not discuss any phasing out of PEPP because it is simply premature” and emphasised that it will not be until the second half of 2022 that the euro area economies on average will return to the pre-pandemic economic level. Elsewhere, the PBoC left its 1 year and 5 year LPR unchanged at 3.85% and 4.65% respectively and the Central Bank of Russia raised rates 50bps to 5%.
Data releases and Biden’s tax plans were the main focus in the US as the Fed remained in a quiet period ahead of its meeting on 27-28 April. The Chicago Fed National Activity Index reading for March bounced back from a contraction in February to 1.71, well ahead of the Bloomberg survey forecast of 1.25 and weekly jobless claims also fell to a pandemic low of 547,000. A slew of April PMI data released on Friday pointed to economic recovery: the US, Eurozone and UK PMI readings for manufacturing and services all showed improvement on the prior month and aside from the US manufacturing PMI came in ahead of the Bloomberg survey median. The US manufacturing PMI registered 60.6 when expectations had been for 61 but the US services reading was extremely strong at 63.1 against expectations of 61.5. Set against this, reports hit the newswires of a Biden proposal to nearly double capital gains tax for rich individuals to 39.6%, which, together with an existing surtax on investment income, means that federal tax rates for investors could be as high as 43.4%. The plan is reported to boost the capital gains rate to almost 40% for those earning more than $1 million, nearly doubling the current base rate of 20%. In addition, the 3.8% tax on investment income that funds Obamacare would be kept in place. Details of the plan are awaited.
In the week ahead, the FOMC meeting and press conference with Jerome Powell on Wednesday will be the key focus. The BoJ is also due to meet on Tuesday with a post-meeting press conference with Governor Haruhiko Kuroda: the outlook for the economy given the covid outbreak and declaration of a state of emergency in Tokyo, Osaka and two other prefectures is likely to be a focus. Central bank speakers due to appear over the week include ECB Executive Board member Fabio Panetta and ECB Chief Economist Philip Lane on Monday, ECB President Christine Lagarde on Wednesday and ECB Vice President Luis de Guindos is due to appear on Thursday. Other events to focus on is Biden’s address to Congress on Wednesday and whether further details on his tax proposals emerge over the course of the week.
Aside from a number of high profile US corporates due to report earnings a number of US economic data releases are due over the course of the week starting with durable goods orders for March on Monday: the survey is looking for a 2.5% mom increase at the headline level. US GDP Q1 advanced reading is due on Thursday: the Bloomberg survey is looking for 6.9% on a quarterly annualised basis. March pending home sales is due on Thursday and US March personal income and spending data along with the PCE deflator on Friday. In the Eurozone, the German IFO April survey of expectations is due on Monday, Eurozone consumer confidence on Thursday and Eurozone GDP on Friday. The Bloomberg survey is looking for Euro area Q1 GDP to decline 0.8% qoq which would push the bloc into a double dip recession since the covid pandemic began. The Eurozone April CPI data is also expected at the end of the week with the survey looking for the reading to pick up to 1.6% yoy from 1.3% yoy the prior month. Elsewhere, China’s April official PMI data for manufacturing and non-manufacturing is due out on Friday.