As we start the new week, the focus is once again on bond yields after their recent rapid rebound. As investors dumped longer-dated government debt, other financial markets have started to feel the pressure with gold being among the first victims (since rising yields increases the opportunity cost of holding assets that pay no interest or dividends like precious metals). Stocks were ignoring the rising yields until a couple of weeks ago, when investors were still happy to keep buying racier assets and those likely to perform well during better economic times, such as equities, copper and crude oil. However, even equities have started to struggle over the past couple of weeks as the yield on the 10-year US government debt closed in on the S&P 500’s dividend yield of around 1.50 percent. Some yield-seeking investors would now think twice about investing in US equity markets without seeing a decent correction first, or until bond yields start falling again.
Bond prices have slumped on speculation that central banks will soon start tapering bond purchases as the global economy recovers from the pandemic with the gradual easing of lockdowns and as inoculation increases.
However, central banks are evidently getting worried about the rising yields and are keen to stop the bond market route. The Reserve Bank of Australia bought double the usual amount of Australian government debt overnight, causing yields to drop sharply. The Bank of Japan was reported to have warned that it too was prepared to quell risk of yields rising too much ahead of the central bank’s policy review on 19th March. German bund yields fell noticeably too, pressuring the euro and causing a rebound in European stock markets Monday morning. This was possibly due to increased purchases of bonds by the European Central Bank, with ECB policymakers repeatedly having talked up the potential to accelerate PEPP purchases if needed.
But what about the US Federal Reserve? Let’s see if the central bank of the world’s largest economy will do anything about rising yields, or its policymakers hint of any policy tweaking such as yield control. There are a few Fed speakers this week, with Powell’s speech on Thursday perhaps the most important one to watch.
It terms of data, there are a few macro releases to keep a close eye on this week, not least the US jobs report on Friday. The other main event is the OPEC meeting on Thursday, which should move oil prices sharply. Here are the data highlights:
- Monday: US ISM Manufacturing PMIs expected to have remained unchanged at 58.7. Chinese manufacturing PMI came in weaker at 50.6, while final PMIs from Japan, Eurozone and UK were all revised higher.
- Tuesday: RBA, German retail sales and unemployment change, and Eurozone CPI
- Wednesday: Aussie GDP, US ADP private payrolls, crude inventories and services PMIs from China (Caixin) and US (ISM), as well as final PMIs from Europe and UK budget
- Thursday: OPEC-JMMC meetings, Fed Chair Powell speech and unemployment claims
- Friday: German factory orders, US nonfarm payrolls report
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