We saw a 6% decline in oil and a sense from investors that yields had risen too far, too fast and the 10-year yield is down 10bp in the last 24 hours, at 1.59%. The decline is split by 7bp real rate and 3bp breakeven. The breakeven decline almost perfectly matched the drop in oil. The real rate has been slowly declining all week, down 12bp from Friday's close. In turn, this stems from the very front end of the rates market. The Eurodollar Futures strip, reflecting 3-month rates, has been instrumental in recent activity.
Unquestionably, the post virus boom narrative has taken a bit of a hit from several sources. Asia demand is still struggling while COVID continues to rear its ugly head in Europe. And in the US, the negative surprises from last week's Industrial Production and this week's Housing Starts have tempered some of that “boomy “feeling.
And we are left scratching our head on why gold is not trading higher with the US yields softer, which suggests it's completely down to the safe-haven appeal of US bonds and the US dollar. Which is not sending a very strong signal to buy gold, And counter to what I thought would happen this morning via softer US yields.
And even risk markets, for that matter, are not really responding to lower US yields. It is possible the new virus variant and uncertainty over the US virus count post Spring Break could be weighing on investors psyche and forward-looking growth expectations. Keeping in mind that a whole lot of economic optimism has been priced into Q2. Hence, and watering down of growth expectations, suggest those optimistic stock market valuations could feel a near term pinch, especially if the economic data remains less supportive or turns sour.
Forex
There continues to be a defensive move, albeit smaller today in FX markets with equities still under some pressure, Treasuries bids and G10 FX were broadly weak against the USD as JPY continues outperforming as the exception in G10, in a classic risk-off fashion.
Insight Into Inflation Risks
The Federal Reserve Bank of San Francisco has taken a look at the US and Euro-Area inflation forecasts. This caught my eye:
"In the United States, the median long-term inflation forecast has remained relatively unchanged since the onset of the pandemic, suggesting that long-term expectations are well anchored. Thus, the recent fiscal stimulus and accompanying growth in federal debt in response to the effects of the pandemic on aggregate demand has not yet manifested in rising long-term inflation expectations."
The usually dovish San Francisco Fed's concern is rather about inflation expectations de-anchoring in an upwards direction versus being pulled lower by secular stagnation.
Oil Markets
Dip buyers emerged as bullish traders believe a new post-pandemic high remains likely in the second half and, provided no new nasty COVID headline, will gradually look through the lockdown blockades, just as the latest oil playbooks suggest; and may be seizing the moment carpe diem style.
So what happened to Goldilocks with some inflation risks? Ultimately, probably not a lot
The narrative about Europe's outlook is grim: the vaccine roll-out is failing, lockdowns are being tightened amid a third wave, and policy is descending into chaos, ranging from last week's panic over vaccine safety to this week's threat over vaccine exports. Yet market consensus may have hit peak pessimism now. At any rate, the outlook may not be as dire as it is portrayed in some circles.
While the recent trend in new cases has been worse in Europe than in the US or the UK, this is not just the result of being behind on vaccines. Earlier this month, the Eurozone was about as open as the US; European workplaces, in particular, are busier than ever in the US. Despite the political rhetoric still emphasizing caution, Europe has seen some remarkable and stealthy reopening. And the data is there to back that up as EU backyards have been a busy spot during lockdowns.
It hasn't all been bad though on the vaccine front either. European scientists believe they've found the cause of blood clots in some people receiving the AstraZeneca (NASDAQ:AZN) vaccine to be something that would be easily treatable, with AstraZeneca doses manufactured in Europe expected to receive EU approval on Mar. 25 (though a fight is brewing between the EU and UK on exports of those doses). AstraZeneca's trial showed the vaccine to be 79% effective with no increased risk of blood clots in the US.
Testy Alaska Talks; US-China Relations In Focus
According to Axios, the White House will host security officials from Japan and South Korea next week to discuss North Korea. The US engaging North Korea came up in Alaska, according to the article.
Separately, the interplay between the growing US-China tech race for internet technology domination and US fiscal policy is one to watch. Senate leaders are looking to put the Endless Frontier Act to Congress in the Spring. Indeed, this could authorize up to $100 bn of research spending in cutting-edge fields over five years, Nikkei reports.
A Carpe Diem Kind Of Day For Oil Markets?
Of course, we cannot forecast how intense the COVID situation will get in the US post-spring break, potentially the most prominent near term growth risk traders face.
Still, the past week's market co-movements have been consistent with a pricing-out of the ex-China pandemic recovery in growth. However, with vaccines rolling out, it's hard not to view the postponements to European reopening as a temporary setback rather than a wholesale reversal of trajectory,
When fine-tuning demand-weighted mobility data against oil demand projections in the UK, Germany, France, Italy and Spain, the modest downgrades to Q2 demand are justified, but a new post-pandemic high remains likely in the second half. It would be consistent with a recovery in Brent calendar spreads suggesting that the recent sell-off could be a carpe diem kind of the moment set up for oil speculators.
If you want to avoid the oil volatility, think about the rationale for oil-leveraged commodity FX where the CAD looked pretty interesting at 1.2600, especially after the Bank of Canada donned the yellow jersey in the Central Bank race to policy normalization.
The Bank of Canada has said it will halt all remaining crisis liquidity programs. And don't forget that announcement follows a bumper set of jobs numbers recently, which saw the unemployment rate drop to 8.2%. Canada has a much lower debt profile than the US making central bank assistance in financing the debt much less of a necessity than in other places, such as the US.