The Daily Update: The Week Ahead

Last week was another challenging week for bond markets: the reflation trade and rising inflation expectations has been pressuring USTs although the speed of the increase in yields has also been unsettling for equity markets. A strong set of non-farm payroll data on Friday saw longer dated USTs in particular initially sell-off, with the UST 10 year yield hitting 1.62%, but then recovered into Friday’s close. The UST 10-year yield increased 16bps to end the week at 1.57% and the 5s30s spread widened 8bps to 150bps. The S&P500 and Nasdaq ended the week +0.81% and -2.1% respectively.

Jerome Powell spoke on Thursday and while his commentary remained dovish it fell short of indicating any firm pushback against higher yields instead acknowledging that the bond market moves “caught my attention” and that he “would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals”. Powell indicated that he did not foresee concerning inflationary pressures: “I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

US economic data erred on the stronger side: the US ISM manufacturing gauge for February came in at 60.8, ahead of expectations of 58.9 and above the prior reading of 58.7. The US ISM services gauge for February was weaker than expected registering 55.3 from 58.7 the prior month. Friday’s non-farm payroll data for February came in stronger than expected showing 397,000 jobs created when expectations had been for an increase of 200,000 jobs (Bloomberg survey) ahead of the release. January’s figure was revised up to 166,000 jobs created from 49,000. The unemployment rate fell to 6.2% in February and the participation rate was unchanged at 61.4%. Importantly, Janet Yellen commented “Although 379,000 jobs sounds like a lot, at that pace it would take us more than two years to get to full employment,” noting that after including the 4 million people who have dropped out of the labour market and the “real” unemployment rate is closer to 10%. Brent Crude has also been a stellar performer gaining 4.9% to close the week at USD 69.36 per barrel and after OPEC+ showed restraint in increasing supply and reflecting hopes of economic recovery.

The UK budget announced an additional GBP65bn in support for the economy, taking total spending on the pandemic for the UK to over GBP350bn. Going forward, the Chancellor Rishi Sunak announced some measures to get the finances on a more stable footing including increasing the headline rate of corporation tax from 19% to 25% from 2023 (applicable to companies with profits in excess of £250,000) and income tax thresholds frozen for the next 5 years, along with inheritance tax, pensions lifetime allowances and annual capital gains tax exemptions. The UK is due to release GDP data for the month of January this coming Friday which will give an indication of the impact of the latest lockdown on the economy: the Bloomberg survey is looking for a 4.9% mom decline. However, with the vaccine roll-out well underway the lockdown is starting to be unwound with schools due to return today.

Eurozone CPI remained benign gaining 0.9% yoy in February and the rise in bond yields and tightening financial conditions appear more of a concern for the ECB at this stage. In the week ahead, the ECB is due to release the bond buying data ahead of the meeting and post meeting press conference on Thursday. An updated set of economic forecasts and discussion around tightening financial conditions and PEPP bond buying are expected to be key areas of interest. In terms of other central bank speakers, BoE Governor Andrew Bailey is due to speak on a webinar on Monday and RBA Governor Philip Lowe is due to speak Tuesday. There are no scheduled Fed speakers this week given the media embargo ahead of the FOMC meeting on 16-17 March. The February US CPI data is due for release on Wednesday and will be closely watched given the pick-up in inflationary expectations while the University of Michigan sentiment index for March on Friday. The Senate voted on Saturday to pass the USD1.95tn Relief package, which heads back to the House this week and will likely be signed into law. At the NPC on Friday last week, China set a growth target above 6% for this year, although the economy is expected to grow at a faster pace than this due to base effects. Quality growth and a general wariness against asset bubbles also seem to be being emphasised. The NPC continues until March 11th. Data-wise, China is also due to release the CPI data for February on Wednesday and new loans data is due this week. In Europe, Germany’s industrial production data for Monday will be of interest as a supply disruption to semiconductor parts is expected to have negatively impacted auto production. The Bloomberg survey is looking for -0.4% mom. Euro area January industrial production is also due for release later in the week. The OECD publishes its interim economic outlook on Tuesday.