The Daily Update: The Week Ahead

Last week the focus remained on vaccination rollouts and economic recovery prospects. On Wednesday, the US House of Representatives approved the USD1.9tn relief package (American Rescue Plan) which was then signed into law by President Biden. He also announced that he wants all adults to have access to vaccination by May 1st, enough vaccine is expected to be in place for all Americans by the end of May. The OECD revised up its US growth estimates to 6.5% and 4% in 2021 and 2022 reflecting the Biden administration’s fiscal stimulus package and a step up in the rate of vaccinations: the impact on this year is notable with growth being revised up by 3.3%. The OECD also revised up its global growth forecast for 2021 and 2022 to 5.6% and 4% respectively as vaccination programmes, additional fiscal support measures and measures to contain the virus improve the outlook. The OECD is looking for China to grow 7.8% in 2021 and 4.9% in 2022 which is ahead of the NPC’s 6% target although base effects will be a factor driving this year’s GDP growth. UK GDP fell 2.9% mom in January exceeding expectations of -4.9% mom, although GDP is still 9% below the pre-pandemic levels in February 2020. The OECD also revised up its UK growth estimates to 5.1% for 2021.

YTD the prospect of stronger growth has pushed up inflation expectations and bond yields in much of the world, although central bank commentary continues to emphasise that base effects will likely cause an increase in inflation and it is likely to be transitory in nature. The introductory statement to the ECB press conference on Thursday noted: “Inflation has picked up over recent months mainly on account of some transitory factors and an increase in energy price inflation. At the same time, underlying price pressures remain subdued in the context of weak demand and significant slack in labour and product markets. While our latest staff projection exercise foresees a gradual increase in underlying inflation pressures, it confirms that the medium-term inflation outlook remains broadly unchanged from the staff projections in December 2020 and below our inflation aim.” The ECB announced it remains concerned about the threat of a premature tightening in financial conditions with the back-up in market interest rates so far this year and it expects to step up the pace up its asset purchases under the PEPP programme compared to the pace earlier this year. European government bonds rallied in response on Thursday.

US headline CPI for February was in line with expectations rising 1.7% yoy and the core reading ex food and energy came in below expectations at 1.3% yoy. Having rallied mid-week, USTs conceded ground into Friday’s close and were not helped by the stronger than expected preliminary March reading of the University of Michigan consumer sentiment index: the UST 10 year yield rose 6bps to 1.63% and the 5s30s spread widened 4bps to 154bps. Over the week, the market had absorbed a heavy amount of issuance although the auctions proceeded smoothly at the time: USD58bn UST 3-year notes, USD38bn of UST10-year notes and USD24bn of 30-year bonds. Equity markets performed better over the week with the S&P 500 and Nasdaq gaining 2.64% and 3.09% respectively.

The week ahead will be dominated by central bank meetings with the Fed, BoE and BoJ due to meet. The press conference on Wednesday post the March 16-17 FOMC meeting will be the focus following a revised set of economic projections and in terms of discussion on rising bond yields. The BoE is due to meet on Thursday with no change to policy is expected but the market will be looking for guidance on asset purchases and any commentary on the impact of rising bond yields. The BoJ meeting is on Friday with Governor Haruhiko Kuroda due to hold a press conference: the outcome of its monetary policy review should be revealed with any potential measures to increase flexibility in how it manages bond yields and its asset purchases a focus. ECB speakers due to speak this week include ECB Governing Council Member Mario Centeno and ECB Vice President Luis de Guindos.

US data releases this week include US Empire Manufacturing index and the Philadelphia Fed survey for March on Monday and Thursday respectively. February retail sales are due on Tuesday and follows January’s blow-out figure of +5.3% mom helped by the December stimulus cheques: the Bloomberg survey is looking for -0.5% mom for February. US building permits and housing starts data for February are also due for release on Wednesday which will be of interest given that mortgage rates have been rising on the back of rising bond yields. On Monday, China is due to release industrial production, fixed asset investment and retail sales data for the January-February period which are expected to show strong growth on a yoy basis as the economic recovery continues. In Germany, the March ZEW survey is due for release on Tuesday and the final reading of euro area CPI for February is due on Wednesday.