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S&P Futures, World Stocks Rise With Yields Clinging To 13 Month Highs Ahead Of FOMC

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by Tyler Durden
Monday, Mar 15, 2021 - 07:59 AM

Global shares rose and US equity futures were flat as U.S. bond yields hovered near a 13-month to start the week as bets economic growth will accelerate kept high duration stocks depressed as investors braced for Federal Reserve and other key central bank meetings in the days ahead. The Dow notched five consecutive record highs last week as approval of one of the largest fiscal stimulus in U.S. history and vaccine rollouts fueled demand for economy-linked stocks such as banks, energy, materials at the cost of tech names with lofty valuations.

At 7:40 a.m. ET, Dow E-minis were up 118 points, or 0.36%, Nasdaq 100 E-minis were up 24.75 points, or 0.19% and S&P 500 E-minis were up 5 points, or 0.1%, fading an earlier gain of 3,948 amid caution how the Fed would respond to the stimulus-fueled snapback in economic activity.

American Airlines and Carnival rose in pre-market trading. U.S. Steel advanced after saying it expects earnings to improve on the back of strong market conditions. FAAMG names all rose between 0.1% and 0.6% in early trade. Microsoft stands to receive nearly a quarter of COVID relief funds destined for U.S. cybersecurity defenders, sources told Reuters, angering some lawmakers who don’t want to increase funding for a company whose software was recently at the heart of two big hacks. Eli Lilly and Co dropped 5% premarket as analysts said the company’s mid-stage trial data for its experimental drug to treat Alzheimer’s cast a doubt on the approval timeline.

The MSCI world equity index was slightly higher, rising by 0.1% by 0847 GMT. The $1.9 trillion stimulus bill President Joe Biden signed into law last week and the rollout of COVID-19 vaccinations stoked a bullish mood, but the focus was gradually turning to the outlook for monetary policy.

“The Federal Reserve is expected to rigidly stick to its easing plans, despite (Fed Chair Jerome) Powell & Co likely becoming significantly more upbeat on the outlook,” said AFS analyst Arne Petimezas in Amsterdam. “However, the risks are towards a hawkish surprise. The $1.9 trillion stimulus has been adopted without much ado and the Biden administration has now set its sight on a big figure infrastructure bill,” he added.

The U.S. House of Representatives gave final approval last week to the COVID-19 relief bill, giving Biden his first major victory in office: “This will provide another shot in the arm for a U.S. economy sprinting out of a deep hole (10 million jobs are still missing at present),” said Natixis economist Troy Ludtka in New York. “We see the macro backdrop - stimulus included - as being sufficient to jolt the U.S. economy beyond the 6% growth mark,” he added in a note.

European shares rose 0.7% in morning trading, with travel companies and automakers leading the Stoxx 600 Index to the highest level in a year. Danone, the world’s largest yogurt maker, jumped 5% after announcing it would replace its chairman.

Earlier in the session, Asian stocks dropped as investors sold technology-related names and bought cyclicals. Mainland Chinese shares, however, dropped despite data showing a quickening in industrial output and a rise in retail sales, with bluechip CSI 300 index falling 2.2% on policy tightening worries. Surveillance equipment maker Hikvision lost 3.2% after the U.S. Federal Communications Commission designated the firm, along with four others Chinese companies including Huawei, as posing a threat to national security.

Economically sensitive firms including Hong Kong insurer AIA Group and auto giant Toyota Motor were among the biggest boosts to the MSCI Asia Pacific Index, while Tencent dragged on the measure, falling for a second day amid concerns over Chinese government oversight. Hong Kong stocks advanced, driven by AIA as well as Xiaomi, which jumped after a U.S. court blocked the Defense Department from restricting American investment in the Chinese smartphone giant. China’s stocks declined as persistent liquidity concerns overshadowed data showing the strength of the nation’s economic recovery. Philippine stocks fell the most in Asia, with its key equity index dropping 2.6%, amid escalating daily coronavirus infections.

Japan outperformed most of its regional peers Monday as investors bought cyclical value names while selling technology shares. Banks and automakers were the biggest boosts to the Topix, while electronics makers and telecom providers fell. Fast Retailing supported the blue-chip Nikkei 225 as SoftBank Group slid. E-commerce and telecom firm Rakuten jumped for a second day, after announcing plans to raise 242 billion yen ($2.2 billion) by selling shares to investors including Japan Post and Tencent Holdings. Japan’s high weighting of economically sensitive stocks has helped it outperform this year, with the Topix up 9.1% compared with a 3.6% rise for the Asian benchmark and 5% advance for the S&P 500.

In rates, the yields on 10-year Treasuries hovered near their 13-month high at 1.6266%, just below the peak of 1.64% hit on Friday as investors fear (but BofA disagrees) a $1.9 trillion relief package, which amounts to more than 8% of the country’s GDP, could stoke inflation.

Higher U.S. bond yields saw the dollar rising against other major currencies. The Bloomberg Dollar Spot Index was steady, having climbed as much as 0.3% during Asian hours. Money managers unwound bearish bets on the dollar by a record in the week ended March 9, according to data from the Commodity Futures Trading Commission. The yen dropped to a nine-month low against the greenback. The dollar index rose 0.1%, while the euro slipped 0.2% to $1.1932 from last week’s high of $1.1990 while the dollar hit a nine-month high of 109.36 against the Japanese yen. The British pound slipped 0.3% to $1.3933.  Leveraged funds bought NZD/USD on speculation the acquisition of assets from New Zealand’s Tilt Renewables Ltd. will spur currency inflows, according to an Asia-based FX trader. NZD/USD rose as much as 0.6% to 0.7216, before paring gains. Option-related selling attached to 0.7200 strikes expiring Tuesday was taken out.  AUD/USD declined 0.2% to 0.7749. Bids attached to FX options at 0.7750 strike, worth notional A$1.26b, and expiring March 18 were partially filled.

“Biden’s economic stimulus is approved and expectations for recovery are heightening, raising hopes for March payroll numbers to come out quite strong to keep U.S. yields elevated,” said Takuya Kanda, general manager at Gaitame.com Research Institute in Tokyo. That should “maintain the bias for dollar buying,” he said

Bitcoin fell 1.6% from a record high after Reuters reported that India would propose a law banning cryptocurrencies.

In commodities, oil prices rose as data showed China’s economic recovery accelerated at the start of 2021, boosting the energy demand outlook at the world’s largest oil importer. Brent crude gained 0.8% to $69.76 a barrel, while U.S. West Texas Intermediate crude added 0.8% to $66.14.

Looking at the weak ahead, major upcoming event include policy statements due Wednesday from the Federal Reserve and Friday from the Bank of Japan. A strong recovery from the Covid-19 recession is likely to prompt Fed Chair Jerome Powell and his colleagues to lift interest rates in 2023, but that isn’t going to show up in their forecasts this week, a survey showed. For growth stocks to rebound, “Powell will have to make some detailed remarks about how to tamp down yields -- but when the market is this heated, that’s highly unlikely,” said Hajime Sakai, the chief fund manager at Mito Securities Co. “Value stocks are still rising, so it’s not as if the entire market is weighed down.”

Some are worried that rising inflation expectations could prompt the Fed to signal it will start raising rates sooner when it announces its latest economic projections at the end of Federal Open Market Committee meeting on Wednesday. “Following the fiscal stimulus packages it is inevitable that Fed GDP forecasts will be revised up, and some FOMC members might think rates will have to move higher sooner than they anticipated last December,” wrote economists at ANZ. The Bank of England and Bank of Japan also have meetings on Thursday and Friday this week.

Monday's data calendar is quiet, with only the Empire State Manufacturing Survey and TIC data on deck.

Market Snapshot

  • S&P 500 futures up 0.3% to 3,943.25
  • SXXP Index up 0.6% to 425.43
  • MXAP down 0.2% to 207.47
  • MXAPJ down 0.5% to 690.26
  • Nikkei up 0.2% to 29,766.97
  • Topix up 0.9% to 1,968.73
  • Hang Seng Index up 0.3% to 28,833.76
  • Shanghai Composite down 1.0% to 3,419.95
  • Sensex down 1.7% to 49,943.69
  • Australia S&P/ASX 200 little changed at 6,773.01
  • Kospi down 0.3% to 3,045.71
  • Brent futures up 0.6% to $69.65/bbl
  • Gold spot down 0.3% to $1,732.15
  • U.S. Dollar Index little changed at 91.72
  • German 10Y yield down 2 bps to -0.33%
  • Euro down 0.2% to $1.1929

Top Overnight News from Bloomberg

  • China’s economic activity surged in the first two months of the year compared with a year ago, though the figures showed an uneven recovery with strong industrial output fueled by exports but lagging consumer spending. The official data released Monday show unprecedented growth rates of more than 30% for key indicators, largely due to distortions when compared to last year’s shutdowns
  • Bank of England Governor Andrew Bailey said an increase in interest rates in financial markets reflects optimism that the U.K. economy will bounce back shortly
  • The European Commission is planning to begin legal action against the U.K. on Monday over the government’s decision to unilaterally change parts of the Brexit deal relating to Northern Ireland, according to a person with knowledge of the discussions
  • Turkey and Brazil may deliver the Group of 20’s first rate hikes in 2021 this week, potentially lending support to two currencies caught in the crosshairs amid surging U.S. Treasury yields

Quick look at global markets courtesy of NewSquawk

Asian equity markets traded mixed with the region tentative heading into this week's plethora of central bank announcements including from the Fed, BoE and BoJ, while the latest Chinese activity data showed a larger than expected increase in Industrial Production and Retail Sales although the tailwinds from the data were short-lived with the surge largely due to base effects. ASX 200 (+0.1%) was choppy as losses in tech and mining names were counterbalanced by strength in energy and defensives, while Nikkei 225 (+0.2%) was kept afloat after machinery orders showed surprise growth Y/Y and with a decline in hospitalizations for the Tokyo region said to allow the government to plan lifting the state of emergency for the capital region instead of extending it when it expires at the end of this week. Furthermore, Rakuten shares rocketed by around 20% in early trade to hit limit up after news the Co. plans a USD 2.2bln share sale to Walmart, Tencent and Japan Post for stakes of 0.9%, 3.6% and 8.3% respectively. Hang Seng (+0.3%) and Shanghai Comp. (-1.0%) were varied with the Hong Kong benchmark led higher by strength in energy names and with Xiaomi the biggest gainer after a US federal judge ordered a temporary halt on enforcing the US investment ban on the Co. The latest activity numbers from China were also encouraging as Industrial Production (35.1% vs exp. 30.0%) and Retail Sales (33.8% vs exp. 32.0%) topped estimates which helped the mainland bourse briefly pare early losses, although the recovery in the mainland was short-lived and the surges in the figures weren’t much of a surprise given the low base from a year ago when China industrial output suffered its sharpest pace of decline in 30 years due to virus-related shutdowns amid the peak of its COVID-19 outbreak. India's Sensex (-0.8%) fell below the 50k mark following disappointing data on Friday. Finally, 10yr JGBs are rangebound amid the tentative mood in stocks and with yields stable overnight, while the lack of BoJ purchases today also ensured quiet trade.

Top Asian news

  • Hong Kong Gives Vaccine Access to Young Adults as Uptake Slumps
  • Junk-Rated Laos Makes Third Attempt at Dollar Bond Offering
  • Protests Signal a Reckoning in Australia’s Struggle With Sexism
  • Chinese Stocks Slump as Upbeat Data Deepens Liquidity Concerns

European equities have kicked off the new week with modest gains across the majors (Euro Stoxx 50 +0.4%), after the region brushed off the selloff seen in China, with the tone across the markets somewhat tentative awaiting the US entrance - which will be an hour earlier due to the US time shift, with volatility expected heading into the open as Americans receive stimulus checks as part of the USD 1.9tln COVID relief package. US equity futures have nursed the mild losses experienced during APAC hours, with the value/cyclically-driven RTY (+0.6%) modestly outperforming peers. Back to Europe broad-based gains are seen across the majors, whilst the periphery sees the FTSE MIB (+1.1%) the outperforming region as banks are bolstered by price action in BTPs alongside potential sector consolidation following reports that the UniCredit (+0.9%) CEO could consider a merger with Mediobanca (+2.4%) or Generali (+0.4%), but was also mulling tie ups with Monte dei Paschi (+0.5%) or Banco BPM (+1.4%), according to Italian press. Further, the index sees tailwinds from Stellantis (+3.2%) after an "overweight" reaffirming at JPM. Sectors in Europe are mostly in the green with no real risk bias nor a particular growth/value skew. Travel & Leisure reside as the top performers amid the continuing vaccinations efforts, whilst IAG's (+2.0%) British Airways is planning for travelers to be able to register their vaccines status via its app in a bid to make it easier for passengers to prove they are safe to travel. Telecoms are also faring well as BT (+3.2%) props up the sector as Ofcom is set to announce on Thursday that BT's Openreach division will be able to make a "fair return" on its super-fast internet, which will allow the Co. to make a double-digit rate of return on its GBP 12bln investment in full-fibre broadband. Autos are bolstered by the aforementioned Stellantis performance whilst EV makers eye Volkswagen's (+2.8%) battery day event. On the flip side, Oil & Gas have continued declining amid price action in the complex. Banks reside at the foot of the pile amid the lower-yield environment. In terms of individual movers, AstraZeneca (Unch) has largely shrugged off the mixed weekend reports whereby Ireland suspended its rollout of that particular drug amid the blood clot reports in Norway, albeit AstraZeneca released a press statement highlighting there there is no evidence of a link between blood clots and the vaccine. Flutter Entertainment (+7.0%) is firmer as the group confirmed it is weighing plans to spin-off its American FanDuel sports betting brand in a US listing. Danone (+3.6%) was bolstered after the Co's board ousted Faber as Chairman amid activist pressure. Finally, ABN AMRO (-4.5%) trades at the foot of the pile with some pointing to a broadened investigation into the bank by Dutch persecutors.

Top European News

  • Roche to Buy Covid Test Maker GenMark for $1.8 Billion
  • Danone Replaces Chairman After Investors Called for Faber’s Job
  • Merkel’s Party Suffers in Regional Votes as Greens Win Big
  • Europe’s Real Estate Investors Put Their Faith in the Office

In FX, firm oil prices and a wider Norwegian trade surplus are helping the Krona make most of a broadly soft Euro against the backdrop of new lockdowns and tighter COVID-19 restrictions in Italy and elsewhere, not to mention defeat for Germany’s CDU party in regional elections. However, the Swedish Crown has been undermined by considerably softer than expected inflation data that may raise more eyebrows at the Riksbank via some of the more dovish members. Hence, Eur/Nok has breached 10.0500 to the downside and Eur/Sek 10.1700 to the upside even though Eur/Usd has slipped back further from recent almost aligning or twin peaks that also coincide with a key Fib retracement level at 1.1990 to trade under 1.1950.

  • NZD/AUD/USD - The Kiwi has regained 0.7200+ status, albeit marginally and in large part due to Aussie underperformance as Aud/Nzd retreats from just above 1.0800 to test bids/support around 1.0750 in wake of dovish commentary from RBA Governor Lowe that has more than offset positives via stronger than forecast Chinese data and the ongoing dividend conversion by mining companies. Indeed, Aud/Usd is pivoting 0.7750 having topped 0.7800 last Friday despite a general loss of recovery momentum in the Greenback that has nudged the DXY off best levels within a 91.866-537 range. Next up for the Antipodean Dollars, Westpac’s Q1 NZ consumer survey, RBA minutes and a speech by Kent.
  • CAD/GBP - Canadian housing starts and manufacturing sales loom, but the Loonie is still basking in jobs data glory following Friday’s impressive labour report, with extra fuel via the aforementioned bounce in crude. Usd/Cad has reversed from just shy of 1.2500 to probe 1.2450 and Sterling has also survived the potential loss of a round number, at 1.3900 with some assistance from quite unexpected remarks from BoE Governor Bailey just days before Thursday’s MPC event – see 8.11GMT post on the headline feed. Cable is now circa 1.3930, but the Pound more perky vs the Euro eyeing stops on a break of 0.8550 again vs a high of 0.8589 at one stage.
  • CHF/JPY - The Franc and Yen are narrowly mixed against the Buck after latest weekly Swiss bank sight deposits showing an absence of intervention and not as weak as feared Japanese machinery orders, with Usd/Chf hovering just under 0.9300 and Usd/Jpy a similar margin beyond 109.00. Note, the latter remains above key chart resistance in the form of the 200 WMA that comes in at 109.01, but has faded roughly 109.37 overnight.

In commodities, WTI and Brent front month futures started the week on the front foot and were both firmer on the session whilst hovering just of best levels despite APAC’s mixed lead. However, since the session opened and the early-arrival of US counterparts, crude futures have erased those gains and are flat on the session at the time of writing. Oil prices may have seen a rise in price following on from Chinese industrial output data which beat expectations and highlights their economy recovery has accelerated at the start of 2021, although this data has been distorted by a lower base effect and the Chinese Lunar New Year holiday. Moreover, top oil exporter Saudi Arabia has cut the supply of April-loading crude to at least four north-Asian buyers by up to 15% whilst meeting the standard monthly requirements of Indian refiners. In further news, the US overtook Saudi Arabia last month and became the second biggest oil supplier to India. This was potentially due to the lower crude demand in the US and Saudi Arabia’s voluntary 1mln BPD output cut alongside the OPEC+ agreement, although it remains to be see how distorted these figures were by the Texas deep-freeze. Adding some context, analysts note that due to the lower demand within the US, the crude had to go somewhere and with Asia seeing rapid demand recovery and China not taking US oil, because of trade problems, India was the obvious choice which resulted in the increase in supply. Additionally, regarding vaccination progress, the continued progression of the vaccine rollouts and increasing prospects of economic growth adds to the sentiment of rising oil prices. However, it should be noted a few countries have provisionally halted the rollout of the AstraZeneca vaccine with the worry it increases the chances of blood clots. WTI resides around the high-USD 65/bbl handle (vs high USD 66.40/bbl), and Brent trades low/mid USD 69/bbl handle (vs high USD 70.03/bbl). Risk events on the table today include ECB asset purchases and looking ahead to further in the week a plethora of central bank’s speaking. Elsewhere, precious metals have traded the early European hours choppy but are both firmer on the session with XAG (+0.8%) more so than XAU (+0.1%), and awaiting further direction from the upcoming risk events. At the time of writing, spot gold is trading just above the USD 1,728/oz handle and spot silver resides marginally above the 26/oz handle. Onto base metals, China's crude steel output rose 12.9% in the first two months of 2021 Y/Y as the mills expanded production in anticipation of strengthening demand from the construction and manufacturing sectors. That being said, Dalian iron ore futures fell some 6% in overnight trade amid the ongoing pollution curbs China's top steel-making city.

US Event Calendar

  • 8:30am: March Empire Manufacturing, est. 14.5, prior 12.1
  • 4pm: Jan. Total Net TIC Flows, prior -$600m
  • 4pm: Jan. Net Foreign Security Purchases, prior $121b

DB's Jim Reid concludes the overnight wrap

Today marks 52 weeks since I started working from home. Over that period I’ve done 100% of my work from my home office. Well apart from the conference call I did with 1500 people on the line from my boiler cupboard last March as that was the only place I had a landline phone connection at the time as my mobile signal died on me. Although WFH has been good, life has got so boring of late that I actually looked forward to a visit to a local country garden on Saturday. My expectations around what weekends can bring have been scaled back considerably. Roll on two weeks today when golf is back on the menu of legal activities.

It might be a bit dull in my home life at the moment but there is rarely a dull week in markets. Last week saw yet another interesting one with amongst others things, all time highs back for US equities after a month break, huge two-way swings in tech, GameStop back above it’s all time high intra-day on Wednesday, Bitcoin above 60k over the weekend, a $1.9tn stimulus package signed off, an ECB meeting that committed to more aggressive bond buying for a quarter but potentially creating cliff risk down the line, and to wrap things off a +8.8bps climb in 10yr US yields on Friday on speculation of a big block seller in the Asian session. We don’t get uneventful weeks at the moment and I can’t see too many of them going forward either given the huge forces and huge sums of money in markets at the moment.

The most impressive thing about Friday was that even though 10yr US real yields actually climbed +9.9bps, US equities clawed their way back to positive territory (+0.1%) on the day after earlier losses. Tech remained weak (NASDAQ -0.59%, NYFANG -1.65%) but rallied from the lows on Friday. We’ll have a fuller review of last week at the end before the day by day week ahead guide.

On this topic our US equity strategists have upgraded their earnings and equity targets in light of the passing of the US stimulus bill and recent DB US GDP upgrades. They have raised their year end 2021 S&P 500 target to 4100 (20.2x $202) from 3950 previously, and to 465 for the Stoxx 600 (17.2x €27) from 450. From current levels, these imply upside of another 5% for the US and 10% for Europe. Their earnings estimates for US (S&P 500) EPS in 2021 increased from $194 to $202 (+43% yoy) and up to $222 for 2022 (+10% yoy). For Europe (Stoxx 600) they’ve raised 2021 earnings growth from +47% yoy to +59%. Reflecting the fact that multiples are already very high, especially in the US, they think these will fall slightly. See their full note here including all their sector preferences.

With yields backing up aggressively on Friday there is only one place to look this week and that’s the FOMC meeting on Wednesday. We’ll preview it briefly below. The Bank of England (Thursday) and Bank of Japan (Friday) also have meetings. While it’s a lighter data calendar, there are a number of important releases. These include US industrial production and retail sales (tomorrow), Euro Area CPI, and March consumer sentiment surveys from around Europe. There will be fewer earnings releases this week with just 32 companies between the S&P 500 and STOXX 600 reporting.

Overnight in Asia, we have seen China’s Jan-Feb main economic data dump with industrial production printing at +35.1% yoy (vs. 32.2% yoy expected) while retail sales came in at +33.8% yoy (vs. 32% yoy expected). The National Bureau of Statistics noted that average growth in industrial production was +8.1% higher than the same period in 2019 compared with +3.2% for retail sales. Fixed asset investments came in on the softer side with a reading of +35% yoy (vs. +40.9% yoy expected) while the surveyed jobless rate jumped to 5.5% at the end of February (vs. 5.2% in December).

Asian markets are generally trading weaker this morning with the Hang Seng ( -0.04%), CSI (-1.97%), Shanghai Comp (-0.92%), Kospi (-0.21%) and India’s Nifty (-1.09%) all down while the Nikkei (+0.07%) is posting small gains. China’s money market rates rose overnight after the PBoC shied away from providing more liquidity into the financial system over and above what is required for that maturing. Overnight repo rate rose by 46bps to 2.24% while seven-day repo rate climbed by 16bps to 2.27%. Sovereign yields continue to rise with those on 10Y USTs up +1bps to 1.636% while those on 10y Australia and New Zealand are up an even larger +8.7bps and +11bps respectively catching up with Friday’s US move. Futures on the S&P 500 are marginally up (+0.05%).

As markets continue to worry about the inflationary pressures, US Treasury Secretary Janet Yellen said over the weekend that US inflation risk remains small and ‘manageable’. We also heard from the ECB Governing Council member Martins Kazaks who said that a “rise in yields will need to be accepted. But it should be gradual to avoid premature tightening.” He also said that “an increase in bond yields will not necessarily mean larger purchases, if we see more of this driven by the strength of the European economy.”

We also got a flavour of what is brewing in German politics over the weekend, with the CDU posting worst results since World War II in two regional election. Support for the CDU slumped by -3.7pp to 23.3% in the western state of Baden-Wuerttemberg compared with the last election in 2016, according to initial projections by public broadcaster ARD. Similarly, the projections for neighbouring Rhineland-Palatinate showed that the support for the CDU dropped by -5.8pp compared with 2016 to 26%. The Greens were the big relative winners on the night. Interesting ahead of Federal elections in the autumn.

Turning to the latest on the pandemic, AstraZeneca said over the weekend that a “careful” review of all available data of the more than 17mn vaccinated people in the European Union and the U.K., shows no evidence of an increased risk of pulmonary embolism, deep vein thrombosis (DVT) or thrombocytopenia. Despite this Ireland became the latest country to temporarily suspend the usage of the AZ vaccine. We also learnt over the weekend that the EU will roll-out J&J vaccine in late April with 200mn doses reaching the EU by the end of summer.

Starting the fuller week ahead preview with the main event of the week now. The FOMC on Wednesday, and the ensuing press conference from Chair Powell, will likely dictate where yields and risk trade for days, if not weeks ahead. In their preview (link here), our US economists highlight that the Committee is likely to update their economic projections with a substantial upward revision to expected growth, a lower unemployment forecasts, and a modestly higher inflation trajectory following the passage of President Biden’s $1.9tn Covid19 relief package. Despite this, Chair Powell is likely to emphasise that significant uncertainties remain and that the recovery has a long way to go, particularly the labour market. Powell is also likely to reiterate that any discussion of tapering is "premature" and that it will likely be "some time" before the Committee can even assess if their goals have been achieved. On the topic of rising yields - US 10yr yields are up around 60bps since the last FOMC meeting in late January - he will likely once again emphasise that the Fed has the tools to deal with issues as they arise and that they would respond to disruptive or persistent tightening of financial conditions as necessary. It’s fair to say it’s a pivotal meeting though.

Meanwhile in the UK, the Bank of England will present their policy decision on Thursday, and much like with the Fed this week and the ECB last week much of the focus will be on how the BOE interprets the recent sharp rise in yields. They are likely to try and strike a similar balance between the market pricing in an improving outlook and not wanting financial conditions to tighten excessively. The market is not expecting a change to either the policy rate or asset purchases.

The final major central bank decision comes from the Bank of Japan on Friday, where our economist (link here) believe it will adjust its present policy framework after the release of the results of its ongoing policy assessment. They see the meeting as more unpredictable following Governor Kuroda’s comments on 5 March, but they believe the bank will consider more effective equity ETF purchasing along with measures to alleviate the adverse side effects of its negative interest rate policy. The week will also see monetary policy decisions from the central banks of Russia, Brazil, Norway and Turkey. Russia is set to keep rates steady, but could hint at tightening financial conditions. On the other hand, Brazil is expected to start a tightening cycle.

Last week risk markets bounced back even as global bond yields largely continued their climb. The S&P 500 gained +2.64% on the week (+0.10% Friday), and rose to a record high for the first time since mid-February on Thursday. Small caps also rose to all-time highs while outperforming strongly as the Russell 2000 gained +7.32% over the five days. Tech stocks recovered as well with the NASDAQ composite up +3.09% over the course of the week, though large cap techs stocks continue to lag their cyclical peers, with NYFANG index rising just +2.03% after an up and down week. Bank stocks on both sides of the Atlantic continued to rise with US Banks rising +4.04% while their European counterparts gained +2.06%. The STOXX 600 outperformed US stocks overall, with the index up +3.52% (-0.26% Friday) with the German DAX (+4.18%), French CAC (+4.56%) and Spanish IBEX (+4.32%) notably outperforming.

US 10yr yields finished the week +5.9bps higher (+8.8bps Friday) at 1.625% - its highest closing level since mid-February of last year. It was the sixth weekly rise in yields, which is the longest streak since Jan/Feb 2018. The move on the long end of the curve saw the 2y10y yield curve steepen another +5.0bps to 147.4bps, its steepest level since September 2015. Meanwhile UK gilts rose +6.6bps to 0.82% 10y bund yields initially fell -5.3bps to three week lows just after the initial ECB revised PEPP announcement but they ended the week down just -0.4bps overall.

In terms of data releases, Friday was a busy day as Germany’s CPI showed prices rose +0.7% MoM and +1.3% YoY in February, both in line with estimates. Meanwhile the UK’s January industrial production numbers came in below expectations, falling -1.5% MoM (vs. -1.0% est) and -4.9% YoY (vs. -4.4% est), highlighting the effects of the most recent lockdown. Even so the UK’s January monthly GDP did not fall as far as feared, coming in at -2.9% (vs. -4.9% est). The Euro Area’s January industrial production rose +0.8% (vs. +0.5% est). In the US, February PPI ex Food and Energy MoM was in-line with estimates at +0.2%, well behind the previous month’s +1.2% rise. March’s Michigan Sentiment survey showed a rebound back to 83.0 (vs. 78.5 est) from 76.8 – its highest level since the start of the pandemic.

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