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After days or lackluster movement, finally markets were shaken on Friday as the US 10YR closed above 1.20% for the first time in 12 months. As such, the reflation theme resumed into the week’s close. Cyclical commodities and metals were top performers, followed by equities. IN FX, USD and NZD were the worst performers while AUD and GBP were the leaders.
After a quiet start (with US away on Monday and China away until Thursday), focus will turn back to the progress on the passage of President Biden’s stimulus plan; the FOMC minutes; bond yields.
The markets are discounting an inflationary recovery, and so far the FED is allowing the “reflation trade” to continue. A looming risk is perhaps some form of Yield Curve Control from the FED…but so far Powell has been dovish and as such, the reflation trade still has legs.
Themes for the Week
- Yields: right now the reflation trade is in vogue, and yields are rising. This will remain the play until the FED starts to talk about yield curve control.
- Vaccine Rollouts: the press was possibly too pessimistic on the delays and distribution issues. Vaccine rollouts are happening and this could further support the recovery.
- Stimulus: the markets are still betting on Biden’s $1.9 Trl stimulus package – and it seems the Democrats will go it alone.
- PMIs: as usual, we will get the flash PMIs for Europe and the UK on Friday, which are tell-tails for further GDP growth.
Data in the Week Ahead:
- China on holiday until Thursday; US on holiday Monday.
- RBA Minutes (Tue)
- GER ZEW (Tue) à Vaccine distribution and rally in stocks should boost sentiment.
- EU Flash GDP Q/Q (Tue)
- RBA’s Kent speaks (Web)
- UK CPI (Wed) à Should come in higher as PMIs reported higher prices recently.
- CAD CPI (Wed) à Should come in higher as IVEY PMI prices component was higher recently.
- US Retail Sales (Wed)
- FOMC Minutes (Wed)
- AU Employment Change (Thur) à PMIs reported stronger employment growth recently.
- ECB Minutes (Thur)
- AU PMIs (Thur) à Should come in stronger as the recovery continues.
- UK Retail Sales( Fri)
- EU & UK Flash PMIs (Fri)
- Cad Retail Sales (Fri)
Correlation Report:
Comment: USD dynamics have taken center stage more recently, overpowering the risk-on dynamic.
On the Radar:
Based on Friday’s close, risk appetite remains strong with equities and crude oil remaining with a bullish slant. AUD and GBP are the clear leaders in FX vs. USD, NZD and JPY weakness.