UST yields remain under significant upward pressure as fiscal stimulus eyed
The bond market sell-off, led by US Treasuries, continues, as investors look ahead to the funding requirements and likely economic impact of the Biden Administration’s proposed $1.9trn fiscal stimulus, which is on track to be voted on by the House as soon as Friday to allow a vote in the Senate next week.
During Friday’s session, the 10Y UST yield hit a 1-year high of 1.36% before settling just below 1.34% at the close (the 30Y bond peaked just above 2.15%). And the reflation theme, which also continues to be evident in other asset prices such as industrial metals, has resumed today with US Treasuries encountering immediate selling pressure, taking the 10Y UST yield to a new high of 1.39% and the 30Y yield up to 2.18%. Greater uncertainty about the future path of rates was reflected in a further rise in real yields on TIPS, with the 10Y real yield up a further few bps to -0.78%.
Perhaps unsurprisingly, on a quiet day economic news from the region, the move in USTs underpinned weakness in Asia-Pacific bond markets, but especially in the Antipodes. Of particular note, the Aussie 10Y bond yield surged 17bps to 1.60% – a rate not seen since May 2019 – while the 3Y yield remained 3bps above the RBA’s 0.10% target even after the Bank stepped in and bought 3Y ACGBs for the first time this year. Meanwhile, the Kiwi 10Y yield increased 13bps to 1.62%, with sentiment regarding the economy receiving a boost from S&P, which raised New Zealand’s foreign currency rating to AA+ and local currency rating to AAA, citing the country’s success in managing the pandemic. Elsewhere, JGB yields also maintained their grind higher, with the 10Y yield up a further bp to 0.11%.
Turning to equity markets, China’s CSI300 began the week firmly on the back foot, sliding over 3% as investors await new PMI readings this coming weekend. South Korea’s KOSPI fell 0.9%, while losses were also seen in Hong Kong and Australia. In contrast, ahead of tomorrow’s national holiday for the Emperor’s Birthday, Japan’s TOPIX reopened strongly to be up more than 1% in early trade. However, with the further rise in UST yields causing US equity futures to move a few tenths lower, the TOPIX pared its advance to close with a 0.5% gain, even as the yen weakened past Friday’s low against the dollar.
The greenback is also slightly firmer against the euro and sterling this morning. But, earlier in the session, the Aussie and Kiwi dollars set new intraday highs, with the former now closing in on levels last seen in early 2018. All else equal, one would expect continued currency appreciation to constrain the sell-off in Aussie bond yields given the negative implications for the inflation outlook and the RBA’s commitment not to tighten policy until actual inflation is sustainably within the target range. However, rising commodity prices clearly provide a helpful boost to national incomes that might place upward pressure on domestic inflation over time.
Japan’s services PPI; following tomorrow’s holiday, a busy Friday is highlighted by the January IP and February Tokyo CPI reports
The only economic release of any note in Japan today was the BoJ’s services PPI report for January. In headline terms the index fell 0.6%M/M – slightly larger than the usual seasonal decline seen in this month – causing the annual inflation rate to dip 0.2ppts to -0.5%Y/Y. The single largest contributor to both the outright decline over the year and the weakening since December was advertising services, with TV advertising prices down 8.0%Y/Y in January – perhaps not surprising in light of the restrictions on activity that were imposed in 11 prefectures during the month. Hotel services prices were also very weak, declining almost 20%M/M in January and so down almost 38%Y/Y. Outside of these industries, there remain only small pockets experiencing any level of positive inflation, suggesting that the services sector is unlikely to contribute to a pick-up in CPI inflation in the near term at least.
Looking at the week ahead, following tomorrow’s national holiday, Wednesday brings just the release the final results of the Monthly Labour Survey for December (revisions are unlikely to alter the picture) and the BoJ’s underlying inflation measures for January. News on nationwide department store sales during January will be released on Thursday. As is often the case, this week’s important economic data will arrive with a rush on Friday, most importantly including the IP report for January. Following two months of modest declines, last month’s survey of manufacturers had pointed to a very strong lift in output in January – even allowing for respondents’ usual optimism – and so it is no surprise to see that Bloomberg’s consensus estimate points to a 4%M/M lift in output during the month. Assuming that forecast is close to mark, it will be interest to see what firms are forecasting for February and March, which will cast light on how much of the January rebound represents activity pulled forward ahead of the LNY holiday. As regards to activity, the January retail sales, housing starts and construction orders reports are also of note on Friday. In addition, the advance Tokyo CPI will provide our first look at developments in inflation during February, which should point to broad stability in the BoJ’s forecast and preferred core measures.
China’s official PMIs a key focus this week, but LNY effects likely still at play
There were no major economic reports in China today. Over the weekend, the PBoC confirmed that the 1-year and 5-year loan prime rates – which provide the benchmark for corporate and housing loans respectively – would remain at 4.85% and 4.65% respectively. This was no surprise, as the rates key off the 1-year MLF rate, which has been held steady at 2.95% since last April.
The key economic focus in China this week will be on the official PMI readings for February, which are scheduled for release on Sunday. Both the manufacturing and services PMIs fell last month, probably in part linked to the impending LNY holiday (especially so as far as the services PMI was concerned). Unfortunately, this month’s readings will likely continue to be impacted by LNY-related variability, reducing the usefulness of these indicators as a gauge of underlying trends. Aside from the PMIs, the only other economic report this week concerns home prices, with developments in January set down for release tomorrow.
German ifo survey due shortly, with more surveys and 1st flash February figures due Friday
Following Friday’s flash PMIs for February, which pointed to significant strength in manufacturing but more acute weakness in services, this week brings further survey results from the euro area, starting with today’s German ifo business climate indices and culminating with the Commission’s comprehensive sentiment indices on Thursday. Inflation figures will also be watched. Tomorrow’s final euro area figures for January are likely to confirm the record increases in the headline and core measures to 0.9%Y/Y and 1.4%Y/Y respectively. And the first flash February estimates of inflation will come on Friday from France and Spain Other data due this week include updated Q4 GDP data from Germany and France on Wednesday and Friday respectively and euro area bank lending figures for January on Thursday.
UK labour market in focus tomorrow
The main data release out of the UK in the coming week will be tomorrow’s labour market report, which is likely to show that the number of payrolls weakened at the start of the year due to the re-imposition of nationwide pandemic containment restrictions. The continuation of the government’s Job Retention Scheme, however, will have continued to limit the extent of lay-offs. Among other indicators, the ILO unemployment rate is expected to rise 0.2ppt in the three months to December to 5.2%, which would be the highest level since September 2015 but still well below the 7¾% rate which the BoE expects to be the peak later this year. And ongoing job cuts will likely be reflected in a further monthly rise in the claimant count rate, which includes those working on low incomes or hours as well as those who are not working at all, from 7.4% in December. Tomorrow’s CBI distributive trades survey for February will also be of some interest. With Covid containment restrictions in place and consumer confidence deteriorating, retail sales are expected to have remained weak this month after the sharper-than-expected drop in January.
US leading indicator ahead today; Q4 GDP revisions, early Q1 activity data & core PCE deflator due later this week
While the Conference Board’s leading index for January and the Dallas Fed manufacturing survey for February will likely have little impact on markets today, a number of important economic reports are due over the remainder of the week. Tomorrow the focus will be on the Conference Board’s consumer survey for February, which Daiwa America Chief Economist Mike Moran expects will report a lift in confidence due to the receipt of stimulus payments and new highs in stock prices. On Wednesday, Mike expects new home sales to have picked up January, playing catch-up with the vigour that continues to be evident in most other housing indicators. On Thursday, the second release of the national accounts for Q4 is likely to find that GDP growth was slightly firmer than the 4.0%AR pace indicated in the preliminary report thanks to upward revisions to various investment expenditures and inventories.
Of greater interest on Thursday will be the latest developments in durable goods orders. Here, after increasing for eight consecutive months, the recovery in orders may have paused in January. The pending home sales report for January and Kansas Fed manufacturing survey for February are also due on Thursday, but will hold lesser interest. On Friday, Mike Moran expects that personal income will have increased a hefty 8.0%M/M in January, largely due to the arrival of stimulus payments, while last week’s bumper retail sales report leads him to expect a solid 1.3%M/M increase in personal spending during the month. While Mike expects the core PCE deflator to have increased 0.2%M/M, this will do no more than leave the annual inflation rate steady at 1.5%Y/Y. The Chicago PMI for February and final results of the University of Michigan consumer sentiment survey for February are also due for release on Friday.
As far as the Fed is concerned, most interest this week will centre on Chair Powell’s delivery of his Semi-Annual Monetary Policy Report to the Senate Banking Committee tomorrow, followed a day later by his delivery of the same to the House Financial Services Committee. Investors will, of course, be especially interested to hear Powell’s thoughts on the continued sell-off in bond markets to divine how the Fed might, if at all, react if yields continue to move higher.
Q4 GDP partials, firms’ capex forecasts and wage data the focus in Australia this week
There were no economic reports of note in Australia today. Tomorrow will bring the release of preliminary merchandise trade data for January and the weekly ANZ Roy Morgan consumer confidence report. On Wednesday, the ABS will report on construction activity during Q4, helping analysts to refine their estimates ahead of next week’s GDP report. That day will also bring the release of the Wage Price Index for Q4, which in the previous quarter had shown annual wage inflation running at a record low of 1.4%Y/Y – a pace that will need to pick up considerably before the RBA will change its very dovish tone. On Thursday, the CAPEX survey will cast further light on GDP growth in Q4, with a particular focus on investment in plant and equipment. Perhaps more importantly, the forward-looking part of the survey will cast light on firms’ expectations for capex over the remainder of this financial year as well as providing the first forecast of spending for the 2021/22 financial year. On Friday, the week will conclude with the RBA’s money and credit aggregates for January, which should confirm that annual growth in private sector credit troughed in November of last year.
The RBNZ’s policy review to take the centre stage in New Zealand this week
The focus in New Zealand this week will be on Wednesday’s RBNZ policy review. Since the last review in November, downside risks to the global economic outlook appear to have declined somewhat, while local labour market and inflation data have proven much stronger than the Bank had expected. Together, these developments have caused markets to price out the possibility of further reductions in the Official Cash Rate. We expect the RBNZ to validate that repricing as a reasonable baseline scenario, especially with house price inflation also surging in recent months. However, we think that the RBNZ’s rhetoric and revised projections will lean heavily against increasing talk of possible retightening as soon as next year, not least due to the worry that this might spark further currency appreciation (which would moderate the need for policy retightening, but produce a mix of monetary conditions that the Bank would regard as unfavourable). Regarding the LSAP bond purchase programme, given the improved economic outlook – reflected in a sharp reduction in the Government’s forecast borrowing needs – it seems increasingly unlikely that the Bank will purchase the full NZD100bn envisaged originally. However, in light of the very sharp lift in Kiwi bond yields since early November – around 100bps for the 10Y bond – the RBNZ will likely be reluctant to lower the cap formally at this stage, instead waiting until new fiscal projections are finalised in the Government’s May Budget.
There are also several important economic reports due this week. Tomorrow the official retail sales report for Q4 will start the countdown to the release of the national accounts next month while the final results of the ANZ Business Outlook survey for February will be released on Thursday. On Friday, the week will end with the release of the ANZ consumer confidence survey for February and the merchandise trade report for January.