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The reflation trade remains top of mind at the moment, but the markets’ reaction was less straightforward. Yields rose, alongside industrial metals and Comm-Dolls, on reports of an additional $3Trl package being discussed, on top of the $1.9Trl already declared. However, it seems higher yields are now starting to weigh on equities and didn’t help the USD. Perhaps markets are focusing on the 30-year real yield, almost into positive territory for the first time since March.
Equities closed lower last week, but the more interesting dynamic is the contraction in volatility – which suggests a range expansion is on it’s way. In FX, CHF, JPY and EUR were weaker vs. AUD,NZD, GBP.
The focus this week will be on FED Chair Powell’s testimony on Tue/Wed, the RBNZ decision on Tue, the US PCE numbers on Friday and then the G20 – President Biden’s first.
Themes for the Week
- Yields: 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. Watch Powell’s testimony for clues.
- RBNZ: the Bank will likely deliver an upbeat assessment of economic conditions and future outlook. Tapering is expected in August this year (for now). The NZ economy is recovering swiftly so risks are to the upside.
- US PCE: inflation growth will be watched closely but the risks are for a large rise on Friday. The question then becomes: how long until the FED starts to curb stimulus?
- Equities: risk appetite is extremely bullish. But the rise in yields and inflation expectations may be dampening the psychological effects of stimulus. Caution is advised.
Data in the Week Ahead:
- Ger IFO (Mon) Ă Expected stronger, after positive ZEW and PMIs.
- NZ Retail Sales (Mon) Ă Could be higher as Credit Card spending was higher in Q4.
- UK Employment Change (Tue) Ă Could come in worse, as PMI Services Employment showed decisive weakness recently, with only minor strength in PMI Manufacturing Employment.
- FOMC’s Powell Testifies (Tue) à Markets want to know what level in yields will spark a reaction from the FED.
- BOC’s Macklem Speech (Tue)
- RBNZ Decision (Wed) Ă Likely upbeat assessment of economic conditions, but no changes in policy.
- FOMC’s Powell Testifies (Wed)
- US Prelim GDP Q/Q (Thur)
- US PCE (Fri)
- G20 (Fri/Sat)
Correlation Report:
Comment: The reflation trade has taken center stage once again, so movements in bonds and risk assets are closely linked.
On the Radar:
Equities closed lower last week, but the more interesting dynamic is the contraction in volatility – which suggests a range expansion is on it’s way. In FX, CHF, JPY and EUR were weaker vs. AUD, NZD, GBP.