Global investors are still pondering the right balance between better growth prospects justifying higher yields and how fast this yield rise might develop before causing unwarranted volatility on other markets, in the first place on the equity markets. European equities opened about 0.75% higher, feeling a positive spill-over for constructive Asian equity trading. However sentiment dwindled during the session while yields gradually returned on the path north. European equities mostly only maintain marginal gains. US indices at the open show a similar picture, with the Nasdaq still underperforming on higher yields (0.5%). The final EMU (composite) PMI printed stronger than expected at 48.8 (vs 48.1) due to a more modest decline in activity in the services sector. The report confirms that the marginal negative impact of lockdowns on the economy is waning. EMU January PPI jumped from 0.9% to 1.4%, but this was no surprise. The US ADP private job growth printed at a disappointing 117k (from 195k in January and 205k expected). The jury is still out what it means for Friday’s payrolls. Even so, the report confirms that the pass-through of (fiscal) stimulus to the labour market goes much slower than for example is the case for retail and/or production. Despite a rather mediocre equity performance and poor ADP, the US yield curve resumed its bear steeping trend with yields rising between 0.6 bps (2-y) and 8.75 bps (10-y). US interest rate markets will keep a close look at the trajectory of the Senate approval for Biden’s $ 1.9 tln stimulus which starts today. European bonds also suffered substantial losses with yields rising between 1.2 bps (2-y) and 6 bps (30-y). The narrative from the ECB on higher yields was a bit more mixed compared to earlier this week when several ECB members warned that the ECB should/can take action to address an unwarranted tightening in financial conditions. Today, ECB Weideman labeled the recent rise in yields as ‘not particularly worrisome’. Moves in 10-y intra-EMU government bonds spreads versus Germany were again very limited, with Greece the exception to the rule (outperformance -6bps).
Trading in the dollar remains some kind of erratic. The US currency regains modest ground after a rather surprising setback yesterday in US dealings. The TW dollar DXY again hovers near the 91 pivot. An early attempt of EUR/USD to regain the 1.21 barrier on a constructive equity sentiment again failed miserably. The pair returned to well-known territory in the mid 1.2050 area. Sterling also showed no clear directional trend, holding stable against the dollar (cable 1.3950) and gaining modestly against the euro (EUR/GBP 0.8640). The UK currency hardly reacted to the UK budget proposal (cf infra). Again, there was also no sterling outperformance at all on a sharp rise in UK bonds yields (rising between 4 bps (2-y) and 11 bps (30-y)).
UK Chancellor Sunak presented the 2021 Budget today. The corporate tax rate will jump from 19% to 25% in 2023, which remains the lowest in the G7. Other initiatives aimed at showing willingness to make derailed public finances sound again include freezing personal tax allowances, the pensions lifetime allowance and the capital gains tax allowance. In the near term, Sunak pledges £25bn for a company tax break to spur investment. Public sector net borrowing has risen to £360bn in 2020-2021 (>15% of GDP) and is forecast to decline to a still massive £234bn in 2021-2022 (>10% of GDP) with the debt ratio set to rise to 97%. The Office for Budget Responsibility estimates UK growth at 4% in 2021 and 7.3% in 2022, with the economy back at its 2019 peak by the middle of 2022. In the medium term, the OBR estimates that the UK economy will be 3% smaller than in its pre-Covid forecasts. The unemployment rate is now expected to peak at 7.5% instead of the 6.5% put forward in November. Sunak also said that the Bank of England’s mandate will be changed to reflect the importance of environmental sustainability and the transition to net-zero. Research showed that its pandemic rescue program effectively subsidized polluting industries.