Sentiment Improving But Still Fragile

March 26, 2021

• Demand for the 7-year Treasury bond auction wasn't as weak as the previous one, but not yet strong.
• Comments by Fed officials Bostic and Evens stuck to the dovish script.
• EU leaders said that AstraZeneca must first deliver the committed vaccines to the region before exporting
• SARB kept rates on hold, as expected, but with no dissenting doves
• A PBoC paper stressed the challenges for the country to reach its growth target

Equities across the APAC region closed the week on the front foot, following the U.S. close higher on positive vaccine distribution news. The Nikkei and Shanghai Comp were both +1.5%. Oil resumed its journey higher as the container stuck in the Suez Canal showed no sign of moving (Brent is back to $63). Treasury yields were higher following the poor 7-year note auction yesterday, leaving the 10-year yields at 1.65%. The dollar is mostly weaker, down about 0.5% against commodity currencies (NOK, AUD, MXN) but slightly stronger against the yen. TRY is underperforming, with USD/TRY back above the 8.0 mark.


Demand for yesterday's much-awaited 7-year Treasury bond auction wasn't as weak as the previous one, but it was far from strong. The sale came in at 1.3%. Foreign buyers (proxied by indirect bidder) came in at 57.3%, well below the recent historical average but far better than the 38.1% in the previous auction. Yields are a few basis points higher across the longer part of the curve after the auction. The 10-year yield is up about 4 bps over the last two sessions, flat on the week and 10 bps below the cycle high of 1.75%.

Comments by Fed officials Bostic and Evens stuck to the dovish script. Bostic (Atlanta Fed President) said clearest: "Let me say unambiguously that I am not at the moment thinking we will need to remove policy accommodation soon." He pushed back against inflation risks and noted the uneven economic recovery in employment. Chicago Fed President Evans also noted the transitory nature of current price pressures. He said, "I suspect that it might be 2024 before we actually raise our interest-rate target."

Initial jobless claims fell to the lowest levels since the start of the pandemic. The March figure fell to 684K, lower than the 730K expected and well below the upwardly revised 781K from February. The regional breakdown showed that much of the surprise was down to Illinois and Ohio. Despite some discussion by the Department of Labor about fraudulent claims, the numbers suggest an improving outlook for the U.S. labor market ahead. About 13.3 mln Americans are still on one of the emergency employment programs. Separately, the third revision of Q4 GDP was 0.2 ppt higher at 4.3% q/q, but this is too backward-looking to be of any relevance.


After a reportedly tense meeting, EU leaders said that AstraZeneca must first deliver the committed vaccines to the region before exporting. Spearheaded by EC president von der Leyen, the group looks ready to take some action, though it's yet unclear what this will be. It's probably safe to assume that any new measure will center around AstraZeneca. The latest numbers show that the EU exported 77 mln doses of the vaccine, more than the 62 mln given internally. 

UK retail sales came in close to expectations at -3.7% y/y, after an extremely depressed -5.9% January reading. But with restrictions easing and the vaccine delivery program's success, we assume this reading will start to improve fast. We are counting on the release of pent-up demand from UK households that have increased savings throughout this period.

The South Africa Reserve Bank (SARB) kept rates on hold 3.50%, as expected, but its model sees the rate rising already this year. Also note that this decision was unanimous, in contrast to two dissenting votes favoring a cut in the last meeting. The bank's model forecast shows two 25 bps hike this year, starting in the second and fourth quarter of the year. So they pushed back the second hike by one quarter, in line with the reduced core inflation forecast for 2021. Higher energy prices led the bank to revise its headline CPI forecast for 2021 from 4.0% to 4.3%, close to the mid-point target of 4.5%. It also increased the growth forecast for the year by 0.2 ppt to 3.6% due to a better global outlook.


A report published by the PBoC yesterday stressed the challenges for the country to reach its growth target. The report claims that the government's counter-cyclical efforts won't be enough to bring GDP above potential, which it envisions to be in the range of 5.0-5.7% until 2025. This, of course, falls short of the official target of "above 6%." Officials also sound a bit more dovish in its latest statement, saying "no sharp turn" in policy will be forthcoming. We still think officials will focus on deflating the risk of bubbles in the equity and real-estate sectors, so some form of gentile tapering is in the cards this year. Still, none of this should deviate too far from the current accommodative stance. The yuan continues to weaken against the dollar gradually, but the moves have been in line with the broader trend in the DXY.

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