Mon, Mar 01, 2021 @ 16:21 GMT
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ECB Tries To Talk Yields Lower – Will Powell Do The Same Today?

Market movers today

  • The key event today is Fed chair Jerome Powell’s semi-annual testimony before the Senate Banking Committee. We do not expect Powell to say anything new, as the Fed has said it very clearly that it will be very patient tightening monetary policy.
  • The UK jobs report for December is due out today at 08:00. We do not think assets like GBP will react much to it given investors are focusing on the post-vaccine world and not on the past.
  • Swedish unemployment data for January are due out at 09:30 CET.
  • Final euro area HICP inflation data for January are due out at 11:00 CET. The most interesting thing is the release of the updated weights after the distortions due to the pandemic in 2020.

The 60 second overview

Central bank communication and yields: It attracted a lot of attention in financial markets yesterday that ECB’s Lagarde said that the bank is closely monitoring the rise in longer-dated yields. It pushed 10y and 30y bund yields some 3bp and 5bp lower during the session. As such, the remarks from Lagarde were no major surprise given the rapid rise in yields and the potential impact on the financial conditions in the Euro zone. However, the weekly PEPP net purchases did not point to a change in ECB bond purchases last week. Today, the big question is if Powell will say something similar. We do expect him to reiterate that the Fed will be very patient with tightening monetary policy, and he might also comment on the recent US curve-steepening. Lagarde and Powell might be able to slow the move higher in yields for now. But when we actually see the reopening and pent-up demand is released on a global scale we expect another move higher in both European and US longer-dated yields.

Financial markets: US yields edged lower during the European session, but edged back up during the US session. It weighed on yield-sensitive tech stocks. Also EM stocks especially Brazil have suffered on political uncertainty together with recent hyped crypto currencies. It seems that stock markets have stabilized in Asia and US equity futures are in green this morning.

Commodities and inflation: Brent oil is trading at USD 66.4 a barrel this morning up USD 3 a barrel in 24 hours supported by a tight inventory balance and an improved demand outlook. OPEC+ will meet March 4 to discuss a possible output boost. Copper also gained further yesterday with 3M LME closing at USD 9,113 a metric ton. Soft commodities such as corn, coffee and sugar are also marching higher. The inflation pressure is building from the commodity side and we notice that both US and German break-evens (inflation expectations) stabilized yesterday after a move lower over the last couple of days.

Equities: Equities slipped yesterday as growth and momentum factors extended their recent underperformance vs value. Cyclicals doing well in Europe but underperforming in the US. Once again huge sector difference with energy sector standing as the best performer after a huge jump in oil price. Financials also higher on bank strength. Tech, consumer discretionary lagged. Energy led the market, posting big gains. In US, Dow +0.1%, S&P 500 -0.8%, Nasdaq -2.5% and Russell 2000 -0.7%.

FI: The recent sell-off in European rates made it into the ECB policy commentaries yesterday as Lagarde said that ‘ECB closely monitor the evolution of longer-term nominal bond yields’ which last night was followed up Villeroy who said they are ‘watching long rates closely as it is an important element of favourable financial conditions.’

FX: FX markets generally appear to be split between continued positive sentiment for Europe and Asia versus leaning into the narrative of rising US real rates, which is positive for broad USD. NOK FX came under renewed pressure with the Norwegian currency finishing as one of the clear losers in FX majors space. In fact, the last week has proven one of our key pillars in our bearish NOK view on a 3-12M horizon, namely that the direction of the global reflation theme by far is the most important driver for the direction of NOK.

Credit: Risk-off continued in credit markets yesterday where iTraxx Xover widened to 251bp (+4½bp) and Main to 48½bp (+1bp). HY also had a rough day, widening 6bp on average, while IG ended ½bp wider.

Nordic macro and markets

Sweden: Riksbank’s Anna Breman will hold a speech on economic policy post corona at 09:00. She will probably stick to her views as seen in the Minutes where she said 1) even if inflation would come in higher than they envisage, there is no need to make monetary policy less expansionary and 2) a rate cut could be an effective tool supporting demand and thus inflation when the pandemic fades. On a separate note, SCB presents labour market statistics for January, but due to new methods in data collection developments will be difficult to interpret.


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