This week was quiet in terms of data releases but still there were some interesting movements in financial markets. In the fixed income markets, long-term yields rose with the 10yr German government bond yields now trading at -0.33% up from -0.45% in the beginning of the week. US 10yr government bond yields went briefly above 1.30% this week. The increases in Europe are mainly driven by higher inflation expectations supported by growing economic optimism and that we can soon put the pandemic behind us while in the US real rates have started to move higher for the same reason amid speculations of when the Fed could start tapering its QE programme and ultimately hike rates. We still see a case for higher yields, especially in the second half of the year, when restrictions are removed, see Yield Outlook: Long yields to rise further as vaccines roll out and economies reopen, 16 February. In the FX markets, the USD has become increasingly cyclical with positive US macro surprises now being positive for USD, something we did not see in 2020. Oil prices have continued higher and were for a short time above USD65/barrel, the highest level since early 2020.
This week we got both Fed and ECB minutes. The Fed minutes did not reveal anything new and the Fed still signals that it will be patient rolling back accommodation. The ECB minutes were somewhat more interesting with arguments for both dovish and hawkish twists in several places. On balance, however, we think the minutes support our expectation that the ECB will increase bond buying (using the flexibility of its current programme) in response to higher yields. The main question remains how much they are willing to buy right now. A lot of focus on very low real rates supporting the economy.
US retail sales in January surprised significantly, as restrictions have been eased and the second round of stimulus payments were paid out. In Italy, former ECB president Mario Draghi is now new Prime Minister, which reduced the Italian government bond yield spreads to Germany. The government is likely to be pro-EU.
The number of new COVID-19 cases continues to decline in the US and Europe. While the pressure to ease restrictions is on the rise, we expect most to remain in place amid vaccinations. Data from the UK and Israel continue to show that the vaccines are working as they are supposed to. For more details see COVID-19 Update: New cases moving lower globally, as more vaccine doses are set to speed up roll-out in Europe, 18 February.
On paper it is a quiet week next week. One of most interesting events is the US FDA decision on whether to approve the Johnson & Johnson vaccine or not. The FDA meeting is on Friday and the emergency use authorisation is expected on Saturday. The most interesting data release is the US monthly private consumption data for January due on Friday. We expect a strong number based on this week’s retail sales but service consumption remains subdued due to the pandemic. We do not expect any new signals from next week’s Fed speeches including when Fed Chair Jerome Powell delivers his semi-annual monetary policy report to the Senate Banking Committee. In Sweden, Q4 GDP data is due out on Friday.
