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Investors Like The Sound Of More Growth And No Inflation

By Stephen InnesMarket OverviewApr 08, 2021 04:32AM ET
www.investing.com/analysis/investors-like-the-sound-of-more-growth-and-no-inflation-200571894
Investors Like The Sound Of More Growth And No Inflation
By Stephen Innes   |  Apr 08, 2021 04:32AM ET
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Although the FOMC minutes offered up little new news on the policy front, the market sure likes the unified FED's very optimistic and balanced tone of more growth and transitory inflation. And it keeps US investors in the candy store mode while feeding off the infrastructure stimulus sugar rush. After all, the US economy is following a much stronger path than had previously been expected and still to be supported by an easy money policy.

The Fed has been here before, perhaps most notably with the aborted lift-off of 2015—placing too much emphasis on what it expected to happen (growth) and not enough attention on what was actually happening (slowdown). A cautionary tone on the policy front is whole warranted, even if the market will soon stop believing it as that same stronger path than had previously been expected would imply earlier rate lift-off than previously anticipated. 

Indeed, price action is likely to be of the "two steps up, one step back" variety as the rates debate continues to unfold through 2021-22

Still, the short term momentum appears to remain in favour of the bulls as investors seem happy and willing to bet on an economic rebound over the coming months in light of the robust data in recent week. And on top of all that, equity volatility continued to remain tepid around its lowest levels since the pandemic began, encouraging risk-taking. 

Sterling Under Pressure

GBP/USD has been notably offered since touching the 1.3915-20 highs on Tuesday and appeared somewhat flow-driven. A combination of factors weighs on sterling as arguably a lot of the recent good news is priced in. At the same time, concerns emerge regarding potential links to side effects from the UK's vaccination workhorse.

There was some aggressive short covering in EUR crosses, particularly EUR/GBP, as we noted yesterday, with participants likely looking for value given the amount of negative news around the EU that may conversely be priced in. Indeed there was a big buying skew in EUR/GBP on Wednesday though the picture elsewhere was a little less telling.

Oil 

Oil bounces continue to run into sellers, which is consistent with the view that the third and fourth wave virus outbreaks in Europe and parts of Asia, notably India, have elevated lockdown concerns that continue to weigh in the market top side ambitions hitting the prompt demand outlooks.

But with EU lockdowns starting to move into the rearview mirror, some buyers on dips are emerging, anticipating some good news on the EU recovery front. My feeling is this will soon be completely digestible and a highly correlated trade the EUR/USD (weaker USD). After all the EURO should move higher on more positive reopening news, particularly around improved vaccination rollout front.

Oil traders may find comfort buying dips knowing OPEC+ will closely monitor macro conditions via monthly meetings. There should be little doubt the group will step in to put a floor on the oil price if macro conditions deteriorate.

China: Higher Cash Demand

China’s benchmark money market rate R007 fixing rose 3bp to 1.95%, ending a four-day drop of 63bp, which likely suggests that the seasonal impact of higher cash demand ahead of the tax-payment deadline is kicking in. China’s onshore liquidity typically tightens in early to mid-April due to

  1. Chinese banks setting aside funds to help their corporate clients pay tax—April is a big month for tax; 
  2. the People's Bank of China will have a window to inject medium-term liquidity into the system midmonth, CNY100 bn of MLF is due next week, and
  3. rates bond issuance.
Investors Like The Sound Of More Growth And No Inflation
 

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Investors Like The Sound Of More Growth And No Inflation

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