US indices charged ahead towards new records overnight, powered by a series of first-rate earnings and a dazzling run of economic data, all supported by the rollout of Covid-19 vaccines and plentiful government and consumer spending suggesting, dare I say, the market can go higher – especially if active managers starting entering the buys.
Retail sales were supported by a powerful combination of tailwinds in March, as economic reopening led to solid job gains and rising household mobility. However, the most crucial factor may have been the delivery of over USD280bn in economic impact payments to households during the month following the American Rescue Plan's enactment.
Indeed, US consumers wasted little time stuffing stimulus checks into starving retailer cash registers, with stocks surging to their ring across the United States as consumers are made willing and able by the confidence of the speedy vaccine rollout.
With the Fed keeping the sugar taps open and offering up free tickets for investors to come frolic in the markets like "kids in the candy store", the transition from policy to growth has been as smooth as silk and a benign reaction in yields suggesting that a growth tantrum is not on the cards anytime soon.
A Louis Vuitton Moment
But with the markets having a bit of "Louis Vuitton" moment (i.e. the best handbags to invest in), it all seems pretty surreal to be rushing to buy value/cyclicals that sell commodity-based products when firms have little pricing power into the winds of inflationary waves.
With solid data (inflation and retail sales) persisting but yields listing lower in a clear illustration of positioning around rates and the remarkably smooth transition from policy to growth, earnings season got underway with US banks setting the tone and the USD drifted lower, taking the VIX down further and putting a passive and systematic bid under the market.
Although fixed income has been bid for the last 24 hours, things accelerated 60 minutes or so after the excellent rush of US data releases overnight as some keen resistance levels were breached across the board. Indeed, this seems to have ushered in another round of bond buying as more folks were squeezed out of some of their shorts. There seem to be mixed views on the street to the extent of the short position, but given the technical break, I would assume that it’s probably the CTAs feeling the most pain out here.
Bonds - The US 10-year yield is down 6.5bp today at 1.54%. It's dropped 6bp since the super-strong charge of data. Such was the extent of the shorts built through late February and early March, so the lack of upside reaction to each successive piece of data has sent the signal. If yields can't go higher in the face of surging NFP, ISM, CPI and now retail sales, then being short appears to be the wrong trade at the moment.
Stocks - There seems to have been very little participation from active equity managers in the last 1.5% move higher in the S&P 500 with essentially zero excess flow over the past week. It’s no surprise that "active equity manager" positioning also remained unchanged week-on-week and has now been slightly underweight for more than a month. At the same time, cash and options volumes have made new year-to-date lows.
So why is the market up? In a quiet tape like this, it seems that passive/systematic flows – which are to buy – have been enough to push the market higher.
Oil markets continued to bask in the afterglow of more bullish demand forecasts from the agencies and a more significant than expected fall in US crude inventories, suggesting demand in the US is on the mend. And with miles driven on the US highways up for the first time since the pandemic outbreak, it means we’re well on the way to a bountiful US summer driving season that could come close to matching the summer of 2019. And forgetting markets for a second: it would have to be the feel-good story of the year if families could feel safe enough to vacation again.
So, with the confluence of planes, trains and automobiles all picking up the pace, hinting that we’re mere steps away from the demand boom, energy prices appear to be turning log-normal despite a few blemishes on the card from the omnipresent Covid concerns. But it's time for life to go on as governments worldwide continue to shore up their vaccine protocols.
The Euro is finding itself in no man's territory, struggling to crack that 1.20 juggernaut that everyone is waiting for the break to provide a more definitive buy signal. I think the Euro is finding the going a bit laborious in the face of tapering talk from the ECB's Banque du France Governor Francois Villeroy de Galhau (Bloomberg); he said the ECB could "possibly exit PEPP by March 2022".
Solid data and a global "risk-on" mood have helped buttress AUD and NZD at recent highs, while USDJPY is a little lower this morning, most likely on lower US Treasury yields rather than finding an echo in some upbeat news on the Japanese economy.
It's a bit different on EM Asia FX with the softer global yields allowing local currency more room to breathe. The yuan showied the way overnight and the beneficiaries of lower real yields in Asia FX should be felt across the board.
The ringgit should continue to benefit from falling US yields, and higher and stable crude prices as a temporary realigning of the commodity currency stars should support sentiment.
Bullion likes the sound of falling US yields overnight, and it didn't take much other than additional US time zone liquidity for gold to kick into a higher gear and catch up with the significant moves in the currency and bond market since quarter-end, despite the dollar trading flat overnight.
And for the gold purists, they were on this move like butter on bread as trading gold from longs on the back of softer US yields and the potential for more details on Biden's USD 3 trillion infrastructure spending plan flat out made sense. But I suspect we have likely overshot a bit or two as this looks to be entirely technically driven and not supported by huge volumes after the break of $1,750.
Summer Doldrums Could Come Early to FX Land
This week I've been harping on about concerns that FX vol could go even lower as the economic data turn out to be meaningless all summer. The transitory inflation effects that the market is most interested in won't signal what won't happen until after summer.
We have now seen strong NFP, significant ISM, higher-than-expected CPI and explosive retail sales. As for bonds, well, as improbable as it may seem, they managed to rally through that period, suggesting everything is in the price. And that’s probably by design as interchangeable central bank narratives have a way of squeezing the juice out of the summer orange, leaving FX traders looking for the next catalyst as things are all of a sudden looking very much priced to perfection.
In other words, it's a function of interchangeable central bank assessments that sees global central banks move to the Fed’s dual mandate beat. So, with every influential G-10 central banker singing from the same hymn sheet, rates volatility and FX market get sapped.
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Most currency pairs are consolidating ahead of today´s NFP release, with the event likely to determine the short-term direction of the US Dollar.