While here in the US the word
Is stimulus, more, is preferred
The UK is thinking
‘Bout how they’ll be shrinking
Their deficit, or so we’ve heard

Meanwhile, China, last night, explained
That excesses would be contained
The bubble inflated
By Powell is fated
To burst, as it can’t be sustained

If you look closely enough, you may be able to see the first signs of governments showing concern about the excessive policy ease, both fiscal and monetary, that has been flooding the markets for the past twelve months.  This is not to say that the end is nigh, just that there are some countries who are beginning to question how much longer all this needs to go on.

The first indication came last night from China, remarkably, when the Chairman of the China Banking and Insurance Regulatory Commission, and Party secretary for the PBOC, explained that aside from reducing leverage in the Chinese property market to stay ahead of systemic risks, he was “very worried” about the risks from bubbles in the US equity markets and elsewhere.  Perhaps bubbles can only be seen from a distance of 6000 miles or more which would explain why the PBOC can recognize what is happening in the US better than the Fed.  Or perhaps, the PBOC is the only central bank left in the world that has the ability, in the words of legendary Fed Chair William McChesney Martin “to take away the punch bowl just as the party gets going”.  We continue to hear from Fed speakers as well as from Treasury secretary Yellen, that the Fed has the tools necessary if inflation were to return, and that is undoubtedly true.  The real question is do they have the fortitude to use them (take away that punch bowl) if the result is a recession?

The second indication that free money and government largesse may not be permanent comes from the UK, where Chancellor of the Exchequer Rishi Sunak is set to present his latest budget which, while still offering support for individuals and small businesses, is now also considering tax increases to start to pay for all the previous largesse.  The UK budget deficit is running at 17% of GDP, which in peacetime is extremely large.  And, as with the US, the bulk of that money is not going toward productive investment, but rather to maintenance of the current situation which has been crushed by government lockdowns.  However, the UK does not have the world’s reserve currency and may find that if they continue to issue gilts with no end, there is a finite demand for them.  This could easily result in the worst possible outcome, higher interest rates, slowing growth and a weakening currency driving inflation higher.  The pound has been amongst the worst performers during the past week, falling 1.4% (-0.1% today), as investors start to question assumptions about the ability of the UK to continue down its current path.

But not to worry folks, here in the US, the $1.9 trillion stimulus bill is starting to get considered in the Senate, where some changes will need to be made before reconciliation with the House, but where it seems certain to get the clearance it needs for passage and eventual enactment within the next two weeks.  So, the US will not be heeding any concerns that going big is no longer the right strategy, despite what has been a remarkable run of economic data.  In the current Treasury zeitgeist, as we learned from Florence + The Machine in 2017, “Too Much is Never Enough”!

Where does that leave us today?  Well, risk struggled in the overnight session on the back of the PBOC concerns about bubbles and threats to reduce liquidity (Nikkei -0.9%, Hang Seng -1.2%, Shanghai -1.2%), but after a weak start, European bourses have decided that Madame Lagarde will never stop printing money and have all turned positive at this time (DAX +0.5%, CAC +0.5%, FTSE 100 +0.6%).  And, of course, that is a valid belief given that we continue to hear from ECB speakers that the PEPP can easily be adjusted as necessary to insure continued support.  The most recent comments come from VP Luis de Guindos, who promised to prevent rising bond yields from undermining easy financing conditions.  US futures, meanwhile, while still lower at this hour by about 0.2%, have been rallying back from early session lows of greater than -0.7%.

Treasury yields continue to resume their climb higher, up another 2.9 basis points this morning, although they remain below the 1.50% level.  In Europe, bunds (+2.0bps), OATs (+2.7bps) and Gilts (+0.6bps) are all giving back some of yesterday’s rally, as risk appetite is making a comeback.  Also noteworthy are ACGBs Down Under with a 5.2 bp rise last night although the RBA did manage to push 3-year yields, their YCC target, even lower to 0.087%.

Commodity prices seem uncertain which way to go this morning, with oil virtually unchanged, although still above $60/bbl, and gold and silver mixed.  Base metals are very modestly higher with ags actually a bit softer.  In other words, no real direction is evident here.

As to the dollar, the direction is higher, generally, although not universally.  In the G10, NOK (+0.6%) is the leading gainer followed by AUD (+0.3%) which has held its own after the RBA stood pat and indicated they would not be raising rates until 2024! That doesn’t strike me as a reason to buy the currency, but that is the word on the Street.  But the rest of the bloc is softer, although earlier declines of as much as 0.5% have been whittled down.

EMG currencies have also seen a few gainers (RUB +0.4%, INR +0.25%) but are largely softer led by BRL (-0.7%) and ZAR (-0.7%).  It is difficult to derive a theme here as the mixed commodity markets are clearly impacting different commodity currencies differently.  However, the one truism is that the dollar is definitely seeing further inflows as its broad-based strength is undeniable today.

There is no data released today in the US, although things certainly pick up as the week progresses from here.  On the speaker front we hear from two arch doves, Brainerd and Daly, neither of whom will indicate that a bubble exists or that it is time to cut back on any type of stimulus.  Perhaps at this point, markets have priced in the full impact of the stimulus bill, and the fact that the Fed is on hold, and is looking at other central bank activities as the driver of rates.  After all, if other central banks seek to expand policy, as we have heard from the ECB, then those currencies are likely to come under pressure.

Here’s the thing; investors remain net short dollars against almost every currency, so every comment by other central banks about further support is going to increase the pain level unless the Fed responds.  Right now, that doesn’t seem likely, but if yields do head back above 1.5%, don’t be surprised to see something out of the FOMC meeting later this month.  However, until then, the dollar seems likely to hold its recent bid.

Good luck and stay safe
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