Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist
End of month and Thursday roller coaster likely busy schedule of data to a sideshow role; digesting overall slightly better than expected Japan run; French & Spanish CPI divergence; awaiting final Q4 GDP readings in EU, India Q4 GVD/GDP and US Goods Trade, Personal Income/PCE and Chicago PMI; EU summit continues, G20 Finance ministers meeting
Market roller coaster: less a tantrum and more a case of smelling the coffee on yield differentials
Eurozone HICP: ECB hoping Spain rather than France is template for German and Italian readings next week, thus supporting ‘look through this narrative’
USA Goods Trade Balance: marginal widening expected; agri and industry supply chain disruptions the wild cards
EVENTS PREVIEW
It is month end, and while the day’s data schedule is busy, it will be the roller coaster rise in bonds and equities in recent days which will the focal and main talking point. There are the run of Japanese data (Tokyo CPI, Industrial Production & Retail Sales) along with French and Spanish HICP, while ahead lie an array of mostly final EU Q4 GDP readings, India’s Q4 GDP/GVA, US Goods Trade Balance, Personal Income and PCE, Chicago PMI and final Michigan Sentiment. On the events side of the equation, there is some BoE and ECB speak, a G20 Finance Ministers meeting and the first vote on the Biden fiscal package. As observed yesterday, the combination of month end rebalancing and the US 10-yr yield crossing above the S&P 500 dividend yield was always likely to be something of a trigger point to counter some of the mindless momentum trading, and so it proved. How this looks once the month end flow dust settles is another question, though it is worth noting, there has been no material impact thus far on the flow of new issuance in either IG or HY Credit, and while there has been a spike in volatility (both VIX and MOVE), realized volatility levels in equity indices is well below implied. This can change, but in principle it points to markets that are unstable (rather than having a tantrum) due to the gargantuan swamp of central bank liquidity, but not per se to a seizure in market financial conditions; at least not yet. However a close eye needs to be kept on EM currencies and asset markets, with the Indonesian Rupiah, Mexican Peso and the optically ‘yield rich’ Turkish Lira among the better proxies – see charts. As a reminder on yield differentials, this Investing Channel video from a couple of weeks ago.
France / Spain – February prov. HICP
After large upside misses in Eurozone and national CPI readings in January, due to a confluence of reweighting, base effect and tax change factors, there will be considerable relief at the ECB that February, if the sharp mean reversal in Spanish readings are echoed in Germany and Italy, though the upside miss in France leaves this open to debate. Eminently there are further adverse base effects that will push inflation back up in coming months, but this at least offers backing for the ECB narrative of needing to look through the inflation indicator noise in H1 2021. Indeed if US CPI were to post a further modest gain in February, it may even put some modest downward pressure on the EU, as yield differentials widen.
U.S.A. – Jan Goods Trade Balance
The Goods Trade deficit is expected to edge wider to $-83.0 Bln from January’s $-82.5 Bln (which was coincidentally also the monthly average deficit in Q4), per se pointing to a modest drag on Q1 GDP from trade, though one month’s data is insufficient to make a call on this. Key swing factors are again likely to agri (Food, Feeds & Beverages), which post a sizeable $1.3 Bln surplus in December, the first surplus in nearly 2 and 1/2 years, much depends on shipments to China, which should remain strong. Supply chain disruptions in many sectors look to be the other wild card, above all semis and autos.
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