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Weekly Focus – Spill Over from Continuing Yield Increase

Yields continued up this week; US 10yr government bond yields reached a one-year high. Oil prices increased above USD67/barrel and industrial metals, particularly copper, have accelerated further as well, weakening safe haven currencies like JPY and CHF. This development has been backed by more positive vaccine news and a cautious Fed.

In his remarks on the state of the economy and the policy outlook, Fed chair Powell repeated that the Fed will remain patient and will not roll back their accommodative monetary policy prematurely. The patient tone supported risk sentiment. Thursday, the higher real rates took a toll on equity markets, though, as Wall Street sold off, erasing earlier gains this week. The selloff also spilled into Asian and European equities.

Members of the ECB’s executive board were out trying to curb yield increases by pledging to keep borrowing costs low, with little effect, though, as 10yr Bund yields continued to trade close to one-year highs. BoJ’s governor Kuroda also highlighted that the bank has no intention of pushing up the yield target for the 10yr JGB at the bank’s upcoming policy review, as it traded close to the highest level since yield curve control was introduced in 2016.

The Johnson and Johnson single shot vaccine is likely up for US approval on Saturday as the FDA finds it safe and effective, also against the South African and Brazilian variant, further decreasing the risk that lock downs will be necessary again. As we see it, the coming month remains uncertain as the improvement in Europe has stalled in many countries and we could be in for another wave in Europe and the US during March due to the more contagious British variant but the outlook for the spring is a lot brighter due to seasonal effects and vaccines.

In the euro area, detailed HICP figures confirmed that the spike in January inflation was primarily due to transitory effects. Smaller clothing sale and package holiday weight cut to 1/3 of the 2020 weight alone can explain 0.5 pp of the 1.2pp increase in headline inflation. We saw French inflation decline somewhat again in February and we will look out for the flash February figures for the euro area next week.

In the US, we have several Fed speakers on the schedule for next week but we do not expect any change in signals. From the Non-farm payrolls we expect positive employment growth but not a significant rebound so overall employment will remain subdued. Restrictions have been eased gradually but the pandemic is not over.

In China we look for a rebound in PMIs next week after declines the past two months. Both because the decline seemed overdone but also because US retail sales reaccelerated in January, which is good for Chinese exports, and seasonal adjustment distortion will also give a boost to the number.

China also has its annual National People’s Congress next week where they announce goals for 2021 as well as the new Five-Year Plan for 2021-2025. Last year China scrapped to set a target for growth and it is expected they will do the same this year and instead highlight employment as a goal like in 2020.

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