The Week Ahead
With the major central bank meetings now out of the way, market attention this week will likely turn back to the pace of the economic recovery, with a focus on the release of the flash PMIs for March. This suggests there’ll be no rest for the weary who are already exhausted by the seemingly never-ending onslaught of higher yields.
Other events in focus will include Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen testifying before congressional committees and an EU leaders' summit at the end of the week; the pandemic and snail's paced rollout of the vaccination programme will top the agenda.
We're not hearing you
Either the market isn’t hearing the Fed, or it believes that the Fed is wrong to dismiss the move higher in inflation. But the swift movements in yields post-FOMC clearly showed the Fed's complacency around upcoming inflation may have unintended consequences.
The problem for risk markets is inflation will be an ongoing debate for another 6 to 12 months, if not longer. So, expect to remain stuck in the inflation "lather, rinse and repeat" cycle as the tides of inflation ebb and flow.
In the meantime, the probability-weighted approach to pricing in a switch in inflation regime leads markets to argue in favour of 10Y US Treasuries moving to 2.25%.
The after-effects from last week’s collapse in oil prices are still lingering in other markets. US Treasury yields are lower – either because their previous surge higher was viewed as over-extended or because the oil price drop has alleviated some inflation concerns and has allowed gold and other risk assets some breathing room – but this might not be a sustainable reason to own long-duration assets right now as the path for oil prices remains higher, hence inflationary pressures – so long as OPEC doesn't rock the boat.
The oil market is searching for answers, with analysts linking the oil price collapse to slow European recovery due to lockdowns and slow vaccine rollouts. This is neither a new nor compelling argument, but lower Asian pricing for Middle East crude and higher Chinese imports for Iranian supply are prime culprits, as is the general cross-asset risk-off tone, which isn’t helping matters.
But the reality is that we’re still a long way from a full demand recovery, and it's the record levels of withdrawn production capacity that’s the main prop for the oil market. So, having crested $70/bbl on sentiment alone, prices were always vulnerable to a pull-back.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again