Yields Higher Ahead of US Fiscal Announcement

Reports say that Biden new stimulus plan is around $2.25 tln; more details later today; Euro area inflation increased in March, but Laggard talks down any risk; Brazil's president Bolsonaro has reshuffled his cabinet towards a more centrist configuration, a short-term positive; Turkish central bank has a new deputy head; the lira remains under pressure; Indonesia's central bank now owns more bonds than offshore investors

• Reports say that Biden new stimulus plan is around $2.25 tln; more details later today
• Euro area inflation increased in March, but Laggard talks down any risk
• Brazil's president Bolsonaro has reshuffled his cabinet towards a more centrist configuration, a short-term positive
• Turkish central bank has a new deputy head; the lira remains under pressure
• Indonesia's central bank now owns more bonds than offshore investors

Global sovereign debt yields are higher, equities lower, and the dollar weaker, but moves have all been modest. The U.S. 10-year Treasury yield is sitting at 1.73%, off its recent highs but not enough to calm markets. Equities are retreating, down 0.3%-1% in Asia, mixed in Europe, and U.S. futures are pointing to a small negative open. Commodity prices are mixed but mostly lower.

AMERICAS

Biden will provide details of the new stimulus plan today, and Treasury markets are already preparing for it. According to the Washington Post, the plan is to increase spending by $2.25 tln. The paper indicates spending on infrastructure is still the centerpiece at $650. Yields continue to rise, making a high at 1.77% yesterday before falling back to 1.73% at the time of writing.

Brazil's president Bolsonaro has reshuffled his cabinet towards a more centrist configuration, so short-term positive on net. The changes involve six posts, including the foreign affairs and justice ministers. The move will reduce some of the internal political pressure and allow for greater coordination in congress. But the changes will only materialize as a medium-term positive if they help generate a more credible budget and impose fiscal constraints. With yields in the back end of the swaps curve rising fast, the country desperately needs a fiscal anchor. For now, however, BRL is up marginally, therefore outperforming most other currencies. 


Brazil reports February consolidated budget data today. A primary deficit of -BRL21.8 bln is expected. The commitment to fiscal restraint remains an open question after congress approved the 2021 budget with some creative accounting to skirt the spending cap limit. This has markets gearing up for more aggressive monetary tightening, with a nearly 100 bp hike priced in for the next meeting on May 5 and another 75 bp hike for the meeting after that June 16, according to the Bloomberg model. Central bank President Campos Neto tried to manage market expectations by stressing that the bank has no plans to move to a neutral interest rate. February IP and March trade data will be reported Thursday. IP is expected to rise 1.5% y/y vs. 2.0% in January.

EUROPE / MIDDLE EAST / AFRICA

Euro area and German inflation increased in March, but ECB President Laggard talks down any risk. Preliminary CPI came for the euro area came in at 1.3% y/y, just below expectations and much higher than the 0.9% print for February. In Germany, CPI came in at 2.0% y/y, up from 1.6% in February to the highest level in almost two years. But the move was in the headline component with the sharp increase in fuel costs. Unemployment came in at -8K (-3K expected). ECB President Lagarde dismissed the upward pressure in yields saying that markets "can test as much as they want," implying it won't make a difference in the policy stance. The bank will continue its purchases and leaning against higher yields. German 10-year yields have been inching higher over the last four consecutive sessions, moving from -0.35% to -0.27% now.

Changes in the Turkish central bank continue, now with a new deputy head. The new committee member Mustafa Duman is a former executive director at Morgan Stanley. If the move was intended to re-establish credibility after swapping the governor, it failed. The lira is down 0.8% on the day, comfortably above the TRY8 level at TRY8.32 now, after rising for the seventh consecutive session. Rates have also shot higher, with the 10-year swap rate rising from around 14% a couple of weeks ago to over 19% now.

ASIA


China's March official PMIs came in stronger than expected. The manufacturing component rose further into expansionary territory to 51.9, while the non-manufacturing one jumped from 51.4 in February to 56.3 in March. The data gives us a better picture of the economy without the seasonal impacts of the New Years' holiday, and it shows a clear rebound in activity. Of note, the export component rose from sub-50 to 51.2, and constriction rose to 62.3.

Foreign investor divestment from Indonesia's local bond markets has reached a new milestone: the central bank now owns more bonds than offshore investors. We've been tracking this data since last year's decision by the government to use explicitly use the BI to finance the deficit, and it's been a one-way trend since then. The BI now holds 23.1% of government bonds compared to 22.9% held by foreign investors. After a large uptick late last year, local bank holdings have stabilized around the near 40%. Foreign investors withdrew nearly $1.5 bln from the local bond market in March alone, up from a $1 bln outflow in February. The 10-year sovereign bond yield has risen from 5.8% to 6.8% so far this year, and the rupiah is one of the worst-performing currencies so far, down 3.3% against the dollar.
 

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