Drivers for the Week of March 21, 2021

Here's a look at the main drivers in Developed Markets this week.

US yields continued to climb in the wake of last week’s FOMC decision; heavy UST issuance continues this week with auctions of 2-, 5-, and 7-year notes; market pricing for the first Fed hike continues to adjust; with the media embargo over, Fed speakers are plentiful this week
Eurozone has a fairly light week; weekly ECB asset purchases will be reported Monday; UK reports some key data; SNB meets Thursday and is expected to deliver a dovish hold
Japan has a busy week

The dollar has recouped all of its knee-jerk post-FOMC losses and then some.  We think the backdrop remains dollar positive and were puzzled by the sell-off, which now looks more and more technical in nature rather than fundamental.  DXY is testing the 92 area again and a break above the 92.044 area would set up a test of the March 9 high near 92.503.  The euro remains heavy and is trading just below $1.19.  A clean break below would set up a test of last week’s low near $1.1835.  Sterling has been outperforming but also feels heavy and is testing the $1.38 area.   A clean break below would set up a test of the February 4 low near $1.3565.  The rise in USD/JPY has stalled a bit after trading at a new cycle high Monday near 109.35.  While the pair is trading back below 109, we believe the pair remains on track to test the June 5 high near 109.85.


US yields continued to climb in the wake of last week’s FOMC decision. The 10-year yield hit an intraday high near 1.75% last week but has since eased to 1.70%.  Given the Fed’s clear signal that it’s not worried about rising yields, the 10-year is on track to test the December 2019 high near 1.95%.  The 3-month to 10-year curve is at 172 bp, the highest since March 2017 and on track to test the December 2016 high near 210 bp.  Elsewhere, the 2- to 10-year curve is at 157 bp, the highest since July 2015 and on track to test the June 2015 high near 176 bp.  

Heavy UST issuance continues this week with auctions of 2-, 5-, and 7-year notes.  $60 bln of 2-year notes will be sold Tuesday; at the last auction, indirect bidders took 57.3% and the bid-to-cover ratio was 2.44.  $61 bln of 5-year notes will be sold Wednesday; at the last auction, indirect bidders took 57.1% and the bid-to-cover ratio was 2.24.  $62 bln of 7-year notes will be sold Thursday; at the last auction, indirect bidders took 38.1% and the bid-to-cover ratio was 2.04.  On top of these, Treasury will also auction $34 bln of 52-week bills Tuesday and $26 bln of 2-year FRNs Wednesday.  Last week saw strong demand for $24 bln 20-year bonds and $13 bln 10-year TIPS.  

Market pricing for the first Fed hike continues to adjust.  Higher odds are creeping further into Q3 2022 and a hike is fully priced in by Q1 2023.  This is at odds with the Fed’s Dot Plots showing steady rates through 2023.  If the timetable continues to accelerate, the Fed may have to push back more forcefully against any notions of tightening coming sooner rather than later.  At the margin, enhanced Fed tightening expectations should help boost the dollar, as other central banks are likely to follow the Fed much, much later.  We saw a similar dynamic play out during the financial crisis.  

With the media embargo over, Fed speakers are plentiful this week.   Powell, Barkin, Daly, Quarles, and Bowman speak Monday.  Bullard, Bostic, Barkin, Brainard, and Williams speak Tuesday.  On Tuesday and Wednesday, Powell appears with Treasury Secretary Yellen before the House and Senate, respectively.  Barkin, Williams, Daly, and Evans speak Wednesday.  Williams, Clarida, Bostic, Daly, and Evans speak Thursday.  All officials are certain to be on the same page of the dovish Fed playbook until further notice.

The Fed said it will let relief from the so-called supplementary leverage ratio ( SLR) expire March 31.  Chair Powell said during the FOMC press conference last week that a statement would be made soon and we got it on Friday.  This can’t have been too much of a surprise, as Fed data show primary dealers sold more than $80 bln of US Treasuries over the past couple of weeks in advance of the announcement.  This emergency relief that excluded USTs and deposits held at the Fed from capital requirements  was granted at the beginning of the pandemic.  With the economy on the mend, it was no longer needed.  Still, the Fed said it would soon propose longer-term changes to the rule to address its treatment of what is considered “ultra-safe” assets.

Fed manufacturing surveys for March will continue to roll out.  Richmond Fed reports Tuesday and is expected at 15 vs. 14 in February, while Kansas City reports Thursday and is expected at 26 vs. 24 in February.  So far, Philly Fed came in at 23.1 vs. 26.5 in January and Empire survey came in at 12.1 vs. 6.0 in January, both stronger than expected.  The US manufacturing sector remains in solid shape, with services expected to catch up quickly as lockdowns end.

Weekly jobless claims Thursday will be watched closely.  Regular initial claims are 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 and 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, then should get an even better NFP number.  Consensus is now 600k vs. 379k in February.

We get our third look at Q4 GDP Thursday.  Growth is expected to remain steady at the second print of 4.1% SAAR.   However, this is now very old news and markets are already looking ahead to Q! 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 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.

Other minor data round out the week.  February Chicago Fed National Activity Index (0.71 expected) and existing home sales (-2.9% m/m expected) will be reported Monday, followed by Q4 current account data (-$187.8 bln expected) and February new home sales (-5.2% m/m expected) Tuesday.  Durable goods orders (0.7% m/m expected) and preliminary Markit March PMI readings will be reported Wednesday.  Manufacturing is expected at 59.5 vs. 58.6 in February, while services is expected at 60.1 vs. 59.8 in February.   February advance goods trade (-$86.0 bln expected), wholesale and retail inventories, personal income (-7.2% m/m expected) and spending (-0.8% m/m expected), core PCE deflator (1.5% y/y expected), and final March University of Michigan sentiment (83.6 expected) will all be reported Friday.


Eurozone has a fairly light week.  It reports preliminary March PMI readings Wednesday.  Manufacturing is expected to fall a tick to 57.8, services is expected to rise three ticks to 46.0, and the composite is expected to rise three ticks to 49.1.  The French composite is expected to rise a couple of ticks to 47.2, while the German composite is expected to rise half a point to 51.6.  That said, we see downside risks to these readings given the ongoing lockdowns and slow vaccine roll-out across Europe.  

Weekly ECB asset purchases will be reported Monday.  The amounts remain underwhelming.  Redemptions last week were EUR4.6 bln, which translates into gross purchases of EUR18.7 bln.  That's slightly higher than EUR18.2 bln, EUR16.9 bln, and EUR18.3 bln totals for the previous three weeks but not by very much.  Last week, ECB President Lagarde told the European Parliament that a faster pace of bond buying will become apparent over time, stressing that “The step-up in the run-rate of our program will become visible when ascertained over longer time intervals.”  At some point, we think the market calls the ECB out on this.  

UK reports some key data.  Labor market data will be reported Tuesday.  Employment for the three months ending in January is expected at -215k vs. -114k previously, pushing the unemployment rate up a tick to 5.2%.  If so, this would be the highest rate since October 2015 and comes despite aggressive government measures to support the labor market.  CBI releases the results of its industrial trends survey for March that same day, with total orders expected at -20 vs. -24 in February. Preliminary March PMI readings and February CPI will be reported Wednesday.  Manufacturing is expected to fall a tick to 55.0, services is expected to jump 1.5 points to 51.0, and the composite is expected to rise nearly 2 points to 51.3.  Headline inflation is expected to pick up a tick to 0.8% y/y, while CPIH is expected to rise a tick to 1.0% y/y.  CBI releases the results of its distributive trades survey for March Thursday, with retailing reported sales expected at -37 vs. -45 in February.  February retail sales will be reported Friday, with headline expected to rise 2.1% m/m vs. -8.2% in January and ex-auto fuel expected to rise 1.7% m/m vs. -8.8% in January.  

Like the Fed, the Bank of England signaled little concern with rising UK yields. Unlike the US, the UK is saddled with a post-Brexit hangover that has resulted in increased trade friction at the borders.  While domestic activity is recovering, we believe the external sector will be a net drag in the economy in the coming months. Because of this, we strongly disagree with short sterling pricing that shows significant odds of the first hike by Q1 2022.   

The Swiss National Bank meets Thursday and is expected to deliver a dovish hold.  At its last meeting December 17, the bank warned that economic momentum will remain weak into early 2021 but saw overall growth between 2.5-3.5%.  New economic forecasts will be issued.  At that last meeting, it also continued to push back against ongoing Swiss franc strength by saying it remains willing to intervene “more strongly” in the FX market and continues to call the Swiss franc “highly valued.”  Since then, the franc has weakened across the board, down -7% vs. sterling, -5% vs. the dollar, and -2% vs. the euro.  We suspect SNB will still continue with its efforts to weaken the currency. Last week, SNB Vice President Zurbruegg  said “Uncertainty about the path of the economy remain very high.  It’s too early to speak of a reversal in interest rates.”


Japan has a busy week.  February convenience store sales will be reported Monday, while department store and supermarket sales will be reported Tuesday.  Preliminary March PMI readings will be reported Wednesday.  March Tokyo CPI will be reported Friday.  Both headline and core (ex-fresh food) inflation are expected at -0.2% y/y vs. -0.3% in February.  Deflationary pressures persist and are likely to persist for several more years.  Current BOJ forecasts see targeted core CPI at 0.5% for FY2021 and at 0.7% for FY2022.  These forecasts will be updated at the April 26-27 meeting, when FY23 forecasts will be added.  Bottom line is that even with these policy tweaks, inflation is likely to remain below the 2% target through FY23 as well.  It may take a little while for the markets to come to grips with the fact that the Bank of Japan’s policy review resulted in nothing really significant.    

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