Last week the prospect of economic recovery and the reflation trade remained a key theme driving asset markets. Vaccination programmes continued and Joe Biden announced the US had finalised the purchase of a further 200m vaccine doses while infection rates continued to fall in the US and UK. The S&P 500 ended the week +1.23% taking it to another record close. The Dow Jones and Nasdaq indices also made new record closes on Friday. USTs, having rallied midweek on a combination of better than expected US inflation data and a dovish speech from Jerome Powell, sold off into Friday’s close. However, the market had absorbed sizeable 10 year and 30 year UST issuance on Wednesday and Thursday ahead of the holiday weekend. The UST 10-year yield increased 4bps to end the week at 1.21% while the UST 30-year yield increased 4bps to end the week at 2.01%.
USTs started the week on a weaker footing following comments from Janet Yellen that the US could return to full employment in 2022 if Joe Biden’s USD1.9tn stimulus package is passed driving the reflation trade. USTs came under pressure in early Monday morning trading although the UST 10-year yield closed out the day unchanged from Friday’s close at 1.17%, the UST 30 year rallied to 1.95% at the close having breached the 2% level intraday. This backdrop supported high yield: the US high yield Bloomberg Barclays US Corporate High Yield market dipped below 4% for the first time ever.
Midweek, USTs rallied although but then conceded ground into Friday’s close: the US January CPI data was benign: the headline and core rates came in at 1.4% yoy below expectations of 1.5% yoy. Plus, Fed Chair, Jerome Powell, in a speech titled ‘Getting Back to a Strong Labour Market’ Powell appeared unconcerned about any potential upside risk to inflation. In fact, he said he does not expect ‘a large nor sustained’ increase in inflation right now, while also downplaying a potential pickup as any recovery gains traction, largely reiterating his views from his January post-FOMC press conference. He said price gains from the ‘burst of spending’ as the economy reopens are ‘not likely to be sustained’. Powell suggested the economy is still a long way from full employment because a recent drop in the jobless rate to 6.3% in January overstates the level of improvement citing the biggest 12-month decline in labour force participation since 1948. He went to say, ‘Experience tells us that getting to and staying at full employment will not be easy’. ‘Important is a patiently accommodative monetary policy stance that embraces the lessons of the past’.
Elsewhere, the Chinese Lunar holidays meant much of Asia was closed at the end of the week. Thus, much of the focus was on the UK GDP which showed the UK economy contracted 9.9% in 2020 which according to the ONS is the largest annual fall on record. However, the UK economy did avoid a ‘double dip’ recession and grew by 1% in Q4. In Europe, Mario Draghi’s secured support from most parties to form a majority government with the backing of Five Star, Italy’s largest party. Draghi was sworn in as Prime Minister on Saturday by President Sergio Mattarella. He has unveiled his cabinet which saw him nominate Daniele Franco as Finance Minister. BTPs have rallied on the back of Draghi moving to form a government: last week the yield on the 10 year BTP tightened 5bps to end the week at 0.48%.
Over the weekend, the US Senate voted 57-43 to acquit Donald Trump in his impeachment trial. The week ahead starts on a quiet note with the US market shut for the Presidents’ Day Holiday and some Asian markets shut for various the Chinese New Year holidays (China, Hong Kong and Taiwan). Thus, the focus is likely to be on Japanese Q4 GDP, capacity utilisation and industrial production on Monday. The minutes from the RBA, Fed, ECB policy meetings will be a focus on Tuesday, Wednesday and Thursday, respectively. Fed speakers include Eric Rosengren and Lael Brainard while ECB Executive Board member Isabel Schnabel is also due to appear. Economic data-wise a slew of Markit PMI data for February is due for the US, Euro area and the UK which will be watched for the impact of continued lockdown restrictions particularly in the UK and Europe. In the US, the January retail sales data on Wednesday will be watched: survey expectations are for the data to increase 0.8% mom, the first positive mom increase since September. Other US data include the Empire Manufacturing gauge and the Philadelphia Fed Business Outlook survey for February on Tuesday and Thursday. January housing starts and existing home sales data are also due in the latter part of the week. In Europe, the German ZEW survey data for February is due on Tuesday and will be studied for signs of how Q1 is progressing given covid restrictions remain in place. The Euro area finance ministers are also due to meet on Tuesday to discuss the economic situation. In the UK, key data releases include the CPI data on Wednesday and January retail sales on Friday.