From every Fed speaker we hear
That prices might rise some this year
But they all confirm
It will be short-term
So, there’s no need to be austere
I feel like today’s note can be very short as there really has been nothing new of note to discuss. Risk is on the rise as market participants continue to absorb the Federal Reserve message that monetary stimulus is going to continue, at least at the current pace, for at least the next two years. That’s a lot of new money, nearly $3 trillion more to add to the Fed balance sheet, and if things hold true to form, at least 60% of it will wind up in the equity market.
This was confirmed by four Fed speakers yesterday, including Powell and Vice Chair Clarida, who made it quite clear that this was no time to start tapering, and that rising bond yields were a vote of confidence in the economy, not a precursor to rising inflation. What about inflation you may ask? While they fully expect some higher readings in the short run due to base effects, they will be transitory and present no problem. And if inflation should ever climb to a more persistent level that makes them uncomfortable, they have the tools to address that too! I know I feel a lot better now.
Europe? The big news was the German IFO Expectations index printing at a much better than expected 100.4, despite the fact that Covid continues to run rampant through the country. While they have managed to avoid the massive Easter lockdown that had been proposed earlier this week, the ongoing failure to vaccinate the population remains a damper on activity, or at least the perception of activity. Otherwise, we learned that Italy is struggling to pay its bills, as they need to find €15 billion quickly in order to continue the present level of fiscal support, but have a much tougher time borrowing, and have not yet received the money from the Eurozone fiscal support package. In the end, however long the Fed is going to be expanding its balance sheet, you can be sure the ECB will be doing it longer.
The UK? Retail Sales were released showing the expected gains relative to last month (+2.
1% M/M. -3.7% Y/Y) and excitement is building that given the rapid pace of vaccinations there, the economy may be able to reopen more fully fairly soon. Certainly, the pound has been a beneficiary of this versus the euro, with the EURGBP cross having declined more than 5% this year, meaning the pound has appreciated vs. the euro by that much. Perhaps Brexit is not as big a deal as some thought.
Japan? The latest $1 trillion budget is being passed, which simply adds to the three supplementary budgets from last year totaling nearly $750 billion, with most observers expecting more supplementary budgets this year. But hey, the Japanese have perfected the art of borrowing unfathomable sums, having the central bank monetize them and maintaining near zero interest rates. Perhaps it should be no surprise that USDJPY has been rising, because on a relative basis, the Japanese situation does seem worse than that here in the US.
Other than these stories, things are just not that exciting. The Suez Canal remains closed and we are starting to see ships reroute around the Cape of Good Hope in Africa, which adds more than a week to transit times and considerable expense. But I’m sure these price rises are transitory too, just ask the Fed.
So, let’s take a quick tour of markets. Equities are all green right now and were so overnight. The three main Asian indices, Nikkei, Hang Seng and Shanghai, all rose 1.6% last night after US markets turned around in the afternoon. European bourses are looking good, with the DAX (+0.6%), CAC (+0.4%) and FTSE 100 (+0.7%) all solidly higher on the day. As to US futures, both Dow and S&P futures are a touch higher, 0.2% or so, but NASDAQ futures are under a bit of pressure at this hour, -0.3%.
In the bond market, 10-year Treasury yields are higher by 4.1bps in the wake of yesterday’s really mediocre 7-year auction. While it wasn’t as bad as the last one of this maturity, it continues to call into question just how able the Treasury will be to sell sufficient bonds to fund all their wish list. Even at $80 billion per month of purchases, the Fed is falling behind the curve here and may well need to pick up the pace if yields start to climb more. I know that is not their current story, but oversupply is certainly at least part of the reason that Treasuries have been so weak. And today, despite ECB support, European sovereign bonds are all lower with yields higher by 4.5bps or more virtually across the board. Either the ECB has taken today off, or there are bigger worries afoot. One little known fact is that alongside the ECB, European commercial banks had been huge buyers of their own country’s debt for all of last year. However, that pace has slowed, so perhaps today’s movement is showing a lack of natural buyers here as well.
Commodity prices are pretty much firmer across the board with the exception of precious metals, which continue to suffer on the back of higher US yields. But oil (+2.3%) is back at $60/bbl and base metals and agricultural prices are all firmer this morning.
Finally, the dollar is broadly weaker at this hour, with the commodity bloc of the G10 leading that group (NZD +0.5%), NOK (+0.4%), (AUD +0.4%), although the pound (+0.3%) is also doing well after the Retail Sales numbers. Meanwhile, the havens are under pressure (JPY -0.5%), CHF (-0.15%), as there is no need for a haven when the central bank has your back!
EMG currencies are a bit less interesting, although the APAC bloc was almost uniformly higher by small amounts. That was simply on the back of the risk-on attitude that was manifest overnight. The one exception here is TRY (-1.1%) which continues to suffer over the change of central bank leadership and concerns that inflation will run rampant in Turkey. Two other noteworthy things here were in LATAM, where Banxico left rates on hold at 4.0% yesterday afternoon and reaffirmed they were entirely focused on data, and that S&P downgrade Chile’s credit rating to A from A+ on the back of the changes in government structure and concerns about the medium term fiscal position.
On the data front we see Personal Income (exp -7.2%), Personal Spending (-0.8%), Core PCE (1.5%) and then at 10:00 Michigan Sentiment (83.6). To me, the only number that matters is the PCE print, but this is a February number, so not expected to be impacted by the significant base effects from last year’s events. Of course, given the constant chorus of any rising inflation will be transitory, we will need to see a lot of high prints before the market gets nervous…or will we? After all, the bond market seems to be getting nervous already.
At any rate, while the dollar is under pressure this morning, my take is that if US yields continue to climb, we are likely to see it retrace its steps. At this point, I would argue the dollar’s trend is higher and will be until we see much higher inflation readings later this spring and summer.
Good luck, good weekend and stay safe