The Daily Update: The Week Ahead

Last week bonds continued to trade with a better tone. The UST 10 year yield tightened 8bps to 1.58% at Friday’s close. The 5s30s spread tightened 2bps to 144bps. The UST rally came despite data releases erring on the stronger side and a good amount of UST issuance to absorb. On Tuesday, the US Treasury auctioned USD24bn 30-year bonds at a yield of 2.32%, which was 1.8 basis points inside the existing treasury. The auction numbers showed good demand with a bid-to-cover and buy-side allocation above recent averages. On Monday there was also issuance of USD58bn 3 year notes and a USD38bn reopening of 10 year notes. Against this backdrop IG credit markets traded with a better tone and the S&P 500 hit another record close ending the week +1.37%.

A number of key data releases and commentary from Jerome Powell and a number of Fed speakers were a focus. Mid-week Jerome Powell appeared at a virtual event for the Economic Club of Washington. He reiterated that the US economy looks to be at an “inflection point” which he expects to lead to “a period of faster growth and high job creation” and that the main risk to the recovery is another spike in covid cases. The Fed Beige Book Report also pointed to a pick-up in the growth momentum of the US economy noting: “National economic activity accelerated to a moderate pace from late February to early April.” The recovery was reflected in Thursday’s data releases: initial jobless claims was better than expected at 575,000 while the headline retail sales figure increased 9.8% mom, ahead of expectations of 5.8% mom, helped by latest round of stimulus cheques, the reopening of the economy and a recovery from bad weather effects in February. February retail sales were revised upwards to -2.7% mom. The Empire Manufacturing and Philadelphia Fed Business Outlook gauges also came in ahead of expectations as did March building permits and housing starts and the preliminary April reading for the University of Michigan sentiment gauge. In terms of inflation news, the US CPI data for March produced no major surprises with base effects having an impact: headline CPI increased 2.6% yoy (expectations 2.5% yoy) and the core rate of CPI (ex food and energy) increased 1.6% yoy (expectations 1.5% yoy).

Elsewhere, China’s Q1 GDP data was another standout figure, +18.3% yoy, reflecting the recovery and low base effect from last year. In contrast, UK GDP for February came in below estimates at 0.4% mom although January’s figure was revised to -2.2% from -2.9%. Germany’s ZEW survey of expectations for April also disappointed, coming in at 70 down from 76.6 the prior month and below expectations of 79, that said it still remains at a high level. The other main news-flow included the Biden administration (in response to election interference and malign activity) announcing a number of punitive measures against Russia. These included expelling a number of Russian diplomats, imposing sanctions on 32 entities and individuals and barring US institutions from participating in new issues of debt issued by the Russian Central Bank, the Ministry of Finance and the sovereign wealth fund after June 14. Importantly, the sanctions were limited in so much that they did not impact the secondary market. Biden stressed the US did not want to escalate the situation and called for a summit with President Putin later in the year. Russia responded with retaliatory measures including expelling a number of US diplomats from Russia. Biden has also called for Putin to de-escalate the situation on the Ukrainian border where Russia has been amassing troops.

In the week ahead, the ECB meeting and post meeting conference with ECB President Christine Lagarde on Thursday will be a key focus. No change is expected to rates, and asset purchases are expected to continue under the PEPP until the next review in June. This week is a quieter week in terms of central bank speakers as the Fed enters a media blackout period ahead of the FOMC meeting on April 27-28. BoE Governor Andrew Bailey and Deputy BoE Governor Dave Ramsden are both due to make speeches on Wednesday. The RBA is also due to release the minutes of its April policy meeting on Tuesday. Other central bank meetings include the Bank of Canada midweek and the Central Bank of Russia on Friday: in the case of Russia another rate rise following the 25bps increase in March is a strong possibility. On Tuesday, the PBoC is due to announce its 1 year and 5 year loan prime rates which are expected to remain unchanged at 3.85% and 4.65% respectively.

Data-wise the preliminary readings for the April Markit PMI data for manufacturing and services is due for the US, UK, France, Germany and the Eurozone on Friday. Otherwise, earnings season continues in the US but data-wise it is a quieter week with the Chicago Fed National Activity Index for March, existing home sales for March due out on Thursday and March new home sales due for release on Friday. The UK is also due to release CPI and retail sales figures on Wednesday and Friday, respectively: the Bloomberg survey is looking for March CPI to rise to 0.8% yoy from 0.4% yoy the prior month. Other key events over the week include President Putin’s annual address to the nation on Wednesday.