Drivers for the Week of March 7, 2021

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

Last week’s jobs data confirms our view that the US economy is gathering momentum; US inflation data take center stage this week; the US curve has steepened to new highs; this all comes on top of heavy US Treasury issuance this week; President Biden’s stimulus plan enters the final stretch; BOC meets Wednesday and is expected to keep policy unchanged; Canada reports February jobs data Friday
ECB meets Thursday and is expected to keep policy unchanged; many analysts believe the ECB is done easing but we are not convinced; ECB releases details of its bond-buying operations every Monday; UK has its monthly data dump Friday
Japan has a busy week; after BOJ Governor Kuroda seemingly shot down any notions of adjusting its YCC, JGB yields sank sharply last week

The dollar continues to gain.  DXY traded Friday at the highest level since November 25 near 92.20 and is on track to test the November 23 high near 92.80 and then the November 11 high near 93.208.  The euro remains heavy after the break below the February 5 low near $1.1950, which sets up a test of the November 23 low near $1.18 and then the November 11 low near $1.1745.  Sterling has found support near $1.38 but remains heavy, and a break below that would set up a test of the February 4 low near $1.3565.  USD/JPY continues its march higher, trading Friday at the highest level since last June near 108.65 and on track to test the June 5 high near 109.85.


Last week’s jobs data confirm our view that the US economy is gathering momentum.  NFP rose 379k in February, while the January gain was revised to 166k from 49k previously.  And with vaccinations and reopenings picking up, the labor market should continue to improve in March.  While there is a risk of some pullback in retail sales in February after the monster gain in January, the stronger jobs growth should help offset this.  And with more stimulus checks coming in March, Q1 is shaping up to be much better than we expected when we started the year.  This underscores are long-standing call that the US economy and US dollar will continue to outperform.

The US growth outlook remains very strong.  The Atlanta Fed’s GDPNow model suggests Q1 growth is 8.3% SAAR, while the New York Fed’s Nowcast model suggests Q1 growth is 8.6% SAAR.  Of note, Bloomberg consensus for Q1 is currently at 4.4% SAAR, picking up to 6.5% SAAR in Q2 and 6.0% in Q3.  Of note, the Q1 and Q2 forecasts have risen nearly a percentage point over the past week.  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.

US inflation data take center stage this week.  February CPI will be reported Wednesday, with headline expected at 1.7% y/y vs. 1.4% in January and core expected steady at 1.4% y/y.  PPI will be reported Friday, with headline expected at 2.7% y/y vs. 1.7% in January and core expected at 2.6% y/y vs. 2.0% in January.  Such acceleration would be noteworthy, especially coming before the low base effects that will boost y/y readings in March, April, and May.  

The US curve has steepened to new highs.  Our favored metric (3-month to 10-year) has risen to 154 bp, the highest since 2017 and on track to test the December 2016 near 210 bp.  The 2- to 10-year spread has risen to 143 bp and is the highest since 2015 and on track to test the June 2015 near 176 bp.  The pace of steepening has so far not been disruptive as equity markets power higher and spread product hold up relatively well.  That said, EM as an asset class has suffered this most during this curve steepening and may end up being the canary in a coalmine for a wider sell-off in risk assets.  Stay tuned.

This all comes on top of heavy US Treasury issuance this week.  These include a $58 bln 3-year note auction Tuesday, a $38 bln 10-year note auction Wednesday, and a $24 bln 30-year bond  auction Thursday.  Keep an eye on indirect bidders, which largely represent foreign buyers.  At last month’s auctions, this share was 52.7% for the 3-year, 60.6% for the 10-year, and 60.5% for the 30-year.  Bid-to-cover ratios should also be watched.  At last month’s auctions, this ratio was 2.39 for the 3-year, 2.37 for the 10-year, and 2.18 for the 30-year.  If these demand metrics deteriorate, then things are likely to get messy.

President Biden’s stimulus plan enters the final stretch.  After a full reading of the bill last week, the Senate began debate Friday and passed it over the weekend by a 50-49 vote.  It goes back to the House this week.  House Majority Leader Hoyer said it will be taken up Tuesday, with .  Despite some income limits, $1400 checks will be sent to millions of Americans.  State and local governments will receive $350 bln in aid, extra $300 per week unemployment benefits will be paid through September 6, and healthcare access will be expanded.  Needless to say, this stimulus will goose the US economy even more.

The  February budget statement Wednesday will draw some attention.  A deficit of -$300 bln is expected vs. -$162.8 in January.  If so, the 12-month total would rise to another record high -$3.54 trln.  Higher outlays continue to put upside pressure on the deficit and that is only going to get worse as the next round of spending is likely enacted this month.  For now, the market has been able to absorb the issuance but this week will provide yet another big test of its appetite.    

Other minor data round out the week.  January wholesale trade sales and inventories will be reported Monday.  January JOLTS job openings will be reported Thursday and are expected at 6650 vs. 6646 in December. Preliminary March University of Michigan consumer sentiment will be reported Friday and is expected at 78.0 vs. 76.8 in February.

Bank of Canada meets Wednesday and is expected to keep policy unchanged.  At its last meeting January 20, the bank delivered a dovish hold, noting that considerable slack remains in the economy that will continue to require “extraordinary” support.  The bank said inflation is unlikely to return “sustainably” to the 2% target until 2023, with excess supply expected to keep a lid on inflation over the horizon.  Most importantly, Governor Macklem admitted that the bank spent a “good bit” of time discussing the amount of stimulus needed and that a so-called “micro-cut” is one option available.  Macklem also pushed back a bit against the strong Loonie then, noting that it poses some risks to the outlook as more appreciation would create additional headwinds.  Since that meeting, CAD has been pretty much flat.   

Canada reports February jobs data Friday.  A 100k gain is expected vs. -212.8k in January, while the unemployment rate is expected to fall a couple of ticks to 9.2%. Like the US, Canada saw a loss of momentum in the economy going into year-end.  Jobs fell in both December and January, and so a gain in February would be welcome.  Yet the vaccine rollout in Canada  has lagged even the laggards in Europe and so regaining that momentum will be all the more difficult.  We expect fiscal policy to carry the burden of stimulus in 2021. 


European Central Bank meets Thursday and is expected to keep policy unchanged.  At the last meeting January 21, the bank sounded a bit more upbeat and that will have to be adjusted this week.  Lagarde admitted at the last meeting, that more robust discussions are likely to come at this meeting and that has certainly come to pass.  Official comments over the past couple of weeks have been at two ends of the spectrum and reflect ongoing dissension over what to do about rising yields.  Given the wide range of views on the need to take action, the bank will do what it usually does under these circumstances and that is….nothing.  We think it will take much more market pressure to get the ECB to pivot towards adding more stimulus.

Many analysts believe the ECB is done easing but we are not convinced.  Since that last meeting, it’s become clear that the vaccine roll-out in Europe  has lagged greatly and impacted the Q1 and perhaps even Q2 outlook, even as monetary conditions are tightening.  New staff forecasts will be released at this week’s meeting and are likely to be marked down from December due to the lockdowns.  At the December meeting, PEPP was increased by EUR500 bln and extended  through at least March 2022.  This meeting is clearly too soon for another increase but the ECB could help set the table for a move later this year with a more bearish outlook.

The ECB releases details of its bond-buying operations every Monday.  Bank officials continued to jawbone rising yields, though Weidmann took the other side and expressed little sense of urgency.  The previous week’s net purchases of EUR12 bln were the lowest since early January.  Even taking out the EUR4.9 bln in redemptions, gross purchases of EUR16.9 bln were the lowest since late January.   If ECB bond purchases picked up last week, then it would signal a stronger commitment to maintaining low yields.  Mere jawboning will have little lasting impact and so if eurozone yields continue to rise, the ECB will have to step up its purchases and eventually increase the so-called envelope for PEPP again. 

Eurozone has a quiet data week.  Germany reports January IP  Monday and is expected to fall -0.4% m/m after a flat reading in December.  Italy reports IP Tuesday (0.8% m/m expected), followed by France Wednesday (0.6% m/m expected).  Eurozone IP will be reported Friday and is expected to rise 0.3% m/m vs. -1.6% in December.  German trade data will be reported Tuesday, with exports expected to fall -1.8% m/m and imports by -1.9% m/m.

UK has its monthly data dump Friday.  January IP, construction output, services index, trade, and GDP will all be reported.  IP is expected at -0.8% m/m vs. +0.2% in December, construction is expected at -1.0% m/m vs. -2.9% in December, services are expected at -5.5% m/m vs. +1.7% in December, and GDP is expected at -4.9% m/m vs. +1.2% in December.  With the lockdowns easing and vaccinations rising, January may have been the worst of it. 


Japan has a busy week. January current account data will be reported Monday, where an adjusted J{Y2.2 trln surplus is expected.  January real cash earnings, household spending, and final Q1 GDP data will be reported Tuesday.  Earnings are expected to fall -0.7% y/y vs. -1.7% in December, which will help drag household spending down an expected -2.1% y/y vs. -0.6% in December.  February machine tool orders will be reported Wednesday, followed by PPI Thursday (-0.7%y/y expected).  Lastly, the Ministry of Finance’s business conditions index for Q1 will be reported Friday. 

After BOJ Governor Kuroda seemingly shot down any notions of adjusting its YCC, JGB yields sank sharply last week.  The market may be reluctant to test the bank ahead of its meeting March 18-19.  That said, policymakers have to be happy with the recent yen weakness that has come along with the flatter curve, so why rock the boat now?  We are becoming more and more convinced that markets are waiting for what is likely to be a largely toothless policy review that maintains the status quo.    

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