The Daily Update: The Week Ahead

Last week USTs traded with a better tone and the S&P500 gained 2.71% to make another record close. Over the week the UST 10 year yield compressed 6 bps to 1.66% and the 5s30s spread widened 8bps to 146bps as the UST 5 year yield tightened 12bps to 0.86% at Friday’s close. These moves followed on from the week before Easter where USTs had already factored in further economic recovery and stimulus news with the strong March US payroll data (916,000 jobs added against expectations of 660,000 jobs added) and President Biden’s plans for a USD2.25tn infrastructure package. Thus, in the last week USTs took the strong US ISM services reading for March and upward revisions to the IMF’s latest growth forecasts in their stride, although on Friday the 10 year yield backed up 4bps from Thursday’s close following the stronger PPI reading. European Government Bonds came under pressure into the end of the week led by BTPs as Prime Minister Draghi brought forward plans for EUR40bn in borrowing but also the ECB minutes pointed to quarterly reviews of the PEPP purchases and noted that “If conditions were such that favourable financing conditions (in the context of the inflation outlook) could be preserved with a slower pace of purchases, the Governing Council could scale down the pace.”

The IMF raised its global growth estimate for 2021 to 6% from 5.5% (in its January forecasts) and increased its 2022 GDP estimate to 4.4% from 4.2%. It also raised its US and China growth estimates to 6.4% and 8.4% respectively. However, the upgrades came with a warning “that high uncertainty surrounds this outlook”. Midweek the minutes from March’s FOMC meeting was a focus: as expected they did not contain any surprises and did not change the expectation for continued accommodative monetary policy: ‘Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized and that, consistent with the Committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then’. On Thursday Jerome Powell while speaking on an IMF panel on the global economy highlighted that “Until the world, really, is vaccinated, we’re all going to be at risk of new mutations and we won’t be able to really resume activity with confidence all around the world.” He cautioned that the US “recovery remains uneven and incomplete”. On Friday, the US PPI data for March came in ahead of expectations at 1% mom when the Bloomberg survey was looking for a 0.5% mom increase. Powell has stated a number of times that inflation measures are likely to move higher in coming months but are expected to have a transient effect on inflation.

Elsewhere, the IMF estimated that the Euro area would grow 4.4% this year. However, covid infections, further lockdown restrictions and a slow vaccine rollout continue to hamper reopening efforts. The IMF is forecasting France to grow 5.8% but in an interview France’s Economy Minister Bruno Le Maire said the economy is expected to now grow 5% in 2021 (down from a previous estimate of 6%) due to the lockdown. Data in the week showed France’s February industrial production fell 4.7% mom when expectations had been for a 0.5% mom increase while German industrial production fell 1.6% mom when expectations were for an increase of 1.5% mom. In China, the March Caixin PMI services reading surprised to the upside at 54.3 while the March PPI and CPI readings gained 4.7% yoy and 0.4% yoy respectively.

In the week ahead the US CPI data on Tuesday and US March retail sales data on Wednesday will be a key focus. The Bloomberg survey is looking for March US headline CPI to increase 2.5% yoy after increasing 1.7% yoy in the prior month. The core reading is expected to increase 1.5% yoy. US retail sales are expected to grow strongly in March following the latest round of stimulus cheques and the weakness in February which was likely exacerbated by the weather (polar vortex) impact: the Bloomberg survey is looking for a 5.5% mom increase. On Friday, the March data for building permits and housing starts is also due. Other US data releases include the Empire Manufacturing and the Philadelphia Fed Business Outlook gauges for April on Thursday and on Friday the University of Michigan Sentiment preliminary reading for April. Elsewhere, data releases this week include Eurozone industrial production and the ZEW survey of expectations on Tuesday. UK GDP and industrial production is due for release on Tuesday with the Bloomberg survey looking for a 0.5% mom increase. On Friday, China’s Q1 GDP is due for release with the Bloomberg survey looking for an increase of 18.5% yoy due to the base effect. In terms of central bank rate decisions, the RBNZ’s decision is due on Wednesday. Otherwise, a slew of central bank speakers from the Fed, ECB and BoE are due to appear over the course of the week. Notably, on Wednesday, Jerome Powell is due to speak at a moderated Q&A session at the Economic Club of Washington. ECB President Christine Lagarde is also due to appear at a Reuters event that day and Executive Board members Fabio Panetta and Isabel Schnabel are due to speak on the digital currency and monetary policy, respectively. Johnathan Haskel, a BoE policy maker, is also due to speak that day. A number of other Fed speakers are also due to appear this week.