Vaccine Sharing Conciliation

March 25, 2021
  • The 5-year Treasury auction was uneventful, which is good
  • Conciliatory words between the UK and EU on vaccine distribution continue; Germany is stepping back from its hard lockdown over Easter
  • The SNB kept rates on hold at -0.75%, as expected, but softened the FX intervention language
  • Turkey's new central bank governor's first comments have signalled some moderation
  • A vote by the Brazilian Supreme Court increases the odds that former President Lula will run in the next elections
  • Elevated CPI readings in Mexico may pressure Baxico into a more hawkish stance

APAC equities were mixed with the Nikkei closing 1%, Chinese indices little changed, and the India Sensex down 0.7%. EU and UK showed signs that vaccine sharing could be achieved while FED Powel was bullish on unemployment and growth, and still looking through inflation. This helped stabilize equity markets in Europe, which are little changed to slightly lower. U.S. futures are slightly higher. The dollar is mixed but mostly trading in narrow ranges, same for sovereign debt yields. Brent crude declined 1% in Asia Efforts to dislodge the Suez Canal blockage continued with it likely being days before trade can resume.


The 5-year Treasury auction was uneventful, which is good. Demand was broadly in line with recent auctions, which showed a slightly weak indirect (proxy for foreign) buying. Yields are little changed this morning, bumping around the 1.62% level for the 10-years, where it has been for the last three sessions. We have a 7-year auction today; the same maturity that triggered negative headlines last month due to weak demand.

Durable goods and PMI data for the U.S. came in weaker than expected. Readings for February preliminary durable goods contracted 1.1%, well below the +0.5% expected. The undershoot seems to be mainly due to the colder weather and the stress in supply chains (such as for vehicles) due to the scarcity of semi-conductors. March PMIs came in closer to expectations at 59.5 for manufacturing, 60.0 for services, and 59.1 for the composite.
Weekly jobless claims come out today, expected at 730k vs. 770k last week. Last week's number for the BLS survey week was not good, but the good news is that regular and PUA initial claims together fell to 1.03 mln, the lowest since late November. Regular continuing claims are expected at 4.025 mln vs. 4.124 mln last week. Continuing claims data are reported with a 1-week lag, so this week's reading will be for the BLS survey week. Last week, emergency plus regular continuing claims fell nearly 1.5 mln to 17 mln. If this improvement is sustained, we should get an even better NFP number. The consensus is now 600k vs. 379k in February.

We also get our third look at Q4 GDP. Growth is expected to remain steady at the second print of 4.1% SAAR. However, this is now old news, and markets are already looking ahead to Q1 and Q2 2021. The Atlanta Fed's GDPNow model suggests Q1 growth is 5.7% SAAR, while the New York Fed's Nowcast model suggests Q1 growth is 6.3% SAAR. The New York Fed just started tracking Q2 and suggests 1.2% SAAR growth. Of note, Bloomberg's consensus for Q1 is currently at 4.5% SAAR, picking up to 6.5% SAAR in Q2 and 6.2% in Q3. The same consensus sees core PCE picking up to 2.1% y/y in Q2 from 1.5% in Q1 before edging back down to 1.8% in Q3 and 1.9% in Q4.

The Brazilian Supreme Court delivered a significant victory for former President Lula, increasing his likelihood of running in the next elections. The court decided by 3 votes to 2 that the judge (Sergio Moro) in charge of the anti-corruption operation, knows as Carwash, was biased and held improper communications with the prosecutor of the case. The prospect of a Lula candidacy in next year's elections will probably haunt local assets, though another four years of Bolsonaro is not especially optimistic for markets either. A more conciliatory tone from President Bolsonaro on handling the pandemic may help near-term sentiment, but we doubt it signals a long-lasting change.

Mexico's CPI readings for March were higher than expected, putting pressure on Baxico to start gearing up for tightening. The bi-weekly inflation reading came in at 4.12% y/y, compared to 3.68% in the previous figure, and above the top of the target (4.0%). The curve is now pricing in 80 bps of hikes this year, according to Bloomberg calculations. Banxico announces its rate decision tomorrow and is almost sure to keep rates on hold, despite a minority of analysts calling for a cut. We think the next step will be to start shifting the language and eventually validate the expected hawkish move priced into the curve.


The conciliatory words between the UK and EU on vaccine distribution continued yesterday. The two sides will meet today to discuss what to do. They issued a joint statement yesterday saying, "we have been discussing what more we can do to ensure a reciprocally beneficial relationship between the UK and EU on Covid-19." Still, there is a long way to go for the EU to catch up in vaccine rollout.

Germany is stepping back from its hard lockdown over Easter. Just a day after announcing the 5-day lockdown, Chancellor Merkel apologized for the decision calling it a "mistake" because there wasn't enough time to implement it. That said, the German government is reportedly looking into travel restrictions during the holidays. Separately, recent polls are not looking good for the ruling CDU party. A couple of polls released yesterday show the CDU/CUS down 2ppts to 27% over the week, which has benefited the Greens (22%).

The SNB kept rates on hold at -0.75%, as expected, but softened the FX intervention language. It still said the franc is "highly valued," but intervention will only happen "as necessary," instead of December's pledge to intervene "more strongly." FX interventions amounted to nearly $120 bln last year to prevent the franc from appreciating. There was no market reaction to the comments, with the franc little changed against the euro or dollar today.

Turkey's new central bank governor's first comments have signalled some moderation. He said the bank would keep the single interest-rate target currently used; meaning officials don't intend to return to the heterodox framework – at least not yet. Still, we don't see any way the new central bank can regain credibility apart from concrete actions, and even then, it will take a lot of time.


The Philippines central bank kept rates on hold at 2.0%, as widely expected. In line with some major central banks' communication, the BSP is looking through the upcoming rising inflation, even as it likely breaches the top end of the 2-4% corridor this year. Next year, however, the official forecast has CPI falling back to 2.8%. Governor Diokno said they "will remain watchful of any signs of inflation becoming broader-based," and didn't give any signs he was ready to act yet. This seems about right to us, given the economy is still in a recession, and the virus outlook is yet to improve.

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