Yesterday’s remarkable ‘entente’ between markets and the Fed was short-lived. Markets were happy to embrace the Fed’s guidance to keep policy accommodative until hard data confirm the bank is reaching its targets. Second thoughts kicked in this morning. US yields easily reversed yesterday’s decline, with the long end setting new recovery highs respectively at 1.74% (10-y) and 2.51% (30-y). The repositioning occurred before US traders entered and without input from EMU or US data. Weekly jobless claims unexpectedly jumped from 712k to 770k. A modest further decline was expected. At the same time, the Philadelphia Fed business outlook was really strong at 51.8 versus 23.3 expected. Almost all subcomponents (both in current conditions and the outlook six month ahead) printed (significantly) stronger that previous month, including the subindices on prices. Yields continued to challenge intraday peak levels after the data. US yields jump from 3 bp for the 2-y to 9/10 bp for 5y/10-y. Higher real yields are the driver, but 10-y break-even inflation also touched the highest level since April 2013. US bonds also dragged European colleagues lower. German yields rising up to 4 bp (10-y) and 5 bp(30-y). ECB President Lagarde before the European Parliament again urged politicians to speed up fiscal spending and reiterated the ECB will prevent a rise in yields that could get ahead of the economic recovery. The ECB action slows fall-out from global steepening on EMU yields, but can’t stop it. The ECB also disbursed €330.5bln under its TLTRO program. The sharp rise in yields was again a source volatility especially on US equity markets. The Nasdaq is losing 1.7%. European equities show better resilience rising between 0.25% and 0.75%. The dollar reverses yesterday’s Fed-inspired setback. Still, given the sharp rise in US (real) yields, gains could have been bigger. DXY is trading near 91.82 (from 91.40). EUR/USD dropped from the 1.1980 area, changing hands near 1.1915. The fragile EUR/USD 1.1836-1.1990 consolidation pattern survives, but the pair isn’t out of the woods yet. USD/JPY (109.15) hovers near recent peak, but fails to extend gains.
The Bank of England as expected left its policy rate (0.1%) and the envelope of Asset Purchases (£895 mld) unchanged. Bailey and Co confirmed the positive assessment of the February monetary policy report. The Bank recognized the rise in UK yields and in sterling since previous meeting, but sees UK financial conditions as broadly unchanged. UK yields joined the sharp steepening trend (10-y +6/7 bp) already before the BoE decision. EUR/GBP tested the 0.8541 2021 low, but with no sustained break (currently 0.8565). Again, the euro ‘survives’, even as the BoE is less worried about the (global) rise in yields.
The Norwegian central bank kept its policy rate unchanged at 0%. The current outlook and balance of risks suggest that a first rate hike will most likely occur in the latter half of 2021, somewhat faster than projected in December. Substantial uncertainty surrounding the economic recovery remains, but activity will approach a normal level earlier than forecast. A swift vaccination process, the accommodative monetary policy and a pick-up in global growth are the main reasons. The central bank points to the marked rise in house prices since spring 2020 and the risk of a build-up of financial imbalances. Core inflation is above target now, but the strong krone and muted wage pressure should help price growth moderate towards <2% levels. The Norwegian krone profited after the meeting, but EUR/NOK 10 proved tough support.
The Turkish central bank hiked its policy rate from 17% to 19% (vs 18% expected). Elevated inflation (>15%) and asymmetric risks for even stronger price pressures triggered the bigger-than-forecast move. The move should help strengthen governor Agbal’s credibility in his fight to anchor inflation expectations. Since arriving, he increased the key rate from 10.25% to currently 19%, defying political pressure to keep rates low. The CRBT wants to keep a hawkish policy stance until it hits the 5% inflation target, which they don’t envision to happen before 2023. The Turkish lira gained after the meeting with EUR/TRY dropping from 9 towards 8.75.