From Marc to Market:
Overview: Even though the NASDAQ closed lower yesterday and the reception of the 10-year Treasury auction did not excite, market participants are growing more confident. Led by China, the major markets in the Asia Pacific region rallied. The Shanghai Composite's 2.35% gain not only snaps a five-session slide but is the largest rally since last October. Europe's Dow Jones Stoxx 600 is stretching its advance into a fourth session and is up around 3.5% this week. US futures are pointing to a gap higher opening. Meanwhile, benchmark yields are softer, and the US 10-year note yield is below 1.50% for the first time since the middle of last week. European yields are 1-3 basis points lower ahead of the ECB meeting. Australian and New Zealand bond yields, which had risen the most, are now leading on the downside with another 6-8 bp pullback today. The US dollar is trading lower against nearly all the majors but the Japanese yen. Emerging market currencies are also mostly higher, and the JP Morgan index is extending its gains after yesterday's advance of a little more than 1%, which was the largest since early November. Gold rose $10.6 yesterday and tested the $1740 level today, its highest level since the middle of last week. It bottomed on Monday near $1677. Oil prices are higher. April WTI bottomed yesterday near $63.15 and is testing the $65.50 area in Europe.
Asia Pacific
The dollar has risen by about 6.5% against the yen since the bottom on January 6, near JPY102.60. It has moved up alongside the US 10-year yield. The rolling 60-day correlation between the yield and the exchange rate reached a high since June 2019 (~0.92). This should not be dismissed as a dog-bites-man observation. The correlation was negative from October 20 through early last month.
In some ways, if the co-movement is so robust, it shifts the question about the yen to what is driving yields. Grand narratives are told about the vast fiscal stimulus ($5.4 trillion in the past 12-months) and the Fed's balance sheet's discovery and dramatic expansion. However, if there is a single quantifiable variable, at the risk of being reductionistic is the price of oil. The rolling 60-correlation of the US 10-year yield and the price of the front-month WTI futures contract is at its highest level since the Great Financial Crisis (~0.96). The correlation was negative from mid-July 2020 through mid-November.....*****....Europe
When officials talk to the press off the record, it always makes sense to ask why or who benefits. Less than 24 hours before the ECB announces its new staff forecasts, one or more people told the press that the estimates will justify the stimulus efforts and does not see a sustained rise in price pressures. This is not surprising and could have been surmised by careful observers of the public record. The near-term GDP forecast is expected to be shaved, reflecting the vaccine's slow rollout, and this year's inflation forecast may be increased a little, mostly reflecting the rise in energy prices. If there is a consensus among major central banks, it is precisely that base-effect, and some supply bottlenecks as the economies begin re-opening will lift measured inflation. There is nearly mathematical certitude that CPI will rise....
....MUCH MORE
