Thu, May 06, 2021 @ 00:33 GMT
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Yields Decline Despite Strong US Economic Data

Market movers today

  • Today is a rather slow day on the data front. We get final March HICP figures from the euro area, which will give us some more clues on what lies behind the divergence in goods and service price inflation.
  • We will also keep an eye on US president Biden’s meeting with Japanese PM Suga, where China will be high on the agenda.

The 60 second overview

US data beat expectations: Retail sales, jobless claims, and regional manufacturing surveys all beat expectations in yesterday’s session. This underpins the current strength of the US economy amid the ongoing reopening, stimulus checks being paid out and rising vaccination rates. We expect the strong momentum to continue in the coming quarters and highlight that the latest news on Biden’s infrastructure bill increases the topside risk to our economic projections for the US economy in the years to come.

FI: US Treasuries rallied despite the strong economic data. Initially the decline was as much as 10bp to 1.53% but the day ended at 1.58%. Yields on the European government bonds also fell and the spread between the periphery and core-EU tightened. The decline in yields was driven from the long end and the curves flattened.

Given the strength of US economic data, the rally is seen to be more “technically” driven such as short-trades being stopped out, foreign demand from e.g. Japan as we are now in a new fiscal year and a shift in the expectations for Federal Reserve hikes. Similar in Europe where we have also seen a significant new issuance and to some extent “ignored” the increase in the QE through higher PEPP buying.

Chinese data: GDP figures out of China this morning revealed a record 18.3 % Y/Y growth in the first quarter of the year. Meanwhile, this growth rate primarily reflects the poor state when the COVID-19 hit the Chinese economy in the beginning of last year. Indeed forward-looking indicators indicate that the economy is set to slow in the coming quarters.

Equities: Thursday saw a buoyant session led by the US. Better macro and earnings underpinned the risk sentiment. Hence, growth and momentum were the main benefiters. S&P closed up 1.1%, Nasdaq 1.3%, Dow 0.9% and Russell 2000 underperforming again, up 0.3%. On sectors, health care, tech and communication services led the market. Financials and energy trailed after the rebound yesterday. Asian markets are mixed to unchanged this morning. US futures signal a slightly red opening.

US imposes sanction on Russia: As a response to Russia’s meddling in the US elections and the hacking of SolarWinds, the Biden administration yesterday imposed sanctions on Russia. From a markets stand point the sanctions notably included the ban on US financial institutions of trading newly issued Russian state debt beyond 14 June this year. Russian assets took a hit with RUB among the biggest losers in FX majors space.

Norway: Yesterday the Norwegian Institute of Public Health (FHI) recommended the continuation of the vaccine-roll out without the AstraZeneca (AZ) vaccine amid blood clot fears. Meanwhile, unlike in Denmark, the government decided to postpone the final decision on the vaccine by setting up a an expert committee which now has until 10 May to decide on the future role of both AZ and the Johnson & Johnson (J&J) vaccines in the Norwegian vaccination schedule. The AZ vaccine will remain suspended until the 10 May decision. FHI estimates that taking out both the AZ and the J&J vaccines would delay Norway’s program by up to seven weeks meaning full vaccination of the adult population will not have been obtained until September. On balance the vaccine setback reduces the likelihood of a September rate hike from Norges Bank but we still regard the probability to be more than 50%.

FX: EUR/USD moved sideways yesterday still trading close to 1.20. EUR/GBP moved sideways as well just below 0.87. EUR/NOK and EUR/SEK both declined amid better risk sentiment and lower US real rates.

Credit: iTraxx Xover tightened to 247bp (-2bp) and Main to 50½ (-½bp). Cash bond barely moved, with HY ½bp tighter while IG closed ½bp wider.


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