How will ECB address the recent rise in yields

Market movers today

The big event of the day is the ECB meeting which will focus on the financing conditions, the rise in yields and the PEPP implementation. We expect the ECB to contine monitoring the situation, stopping short of specific action at today's meeting.

The EU is set to approve the Johnson and Johnson vaccine.

The 60 second overview

US. The House passed President Joe Biden's relief package yesterday and now it only needs the President's signature to become law. The combination of very stimulating fiscal policy and a much faster vaccination pace (the US now expects to have completed vaccinations in May) means that we have become much more bullish on the US economy, where we now expect GDP to exceed the old GDP trend in Q3 21. For more details see Research US: Overshooting the old GDP trend path in Q3 21.

The impact on the US Treasury market was very modest as yields declined on the back of weaker than expected inflation data. The demand at yesterday's 10Y US Treasury bond auction was a bit more moderate than the average over the past year. Furthermore, the bonds were sold 1bp cheaper than in the secondary market. Tonight, the US Treasury will sell USD 24bn, and again there will be significant focus on the auction regarding the demand.

The main event today is the ECB meeting. We do not expect any significant change to ECB monetary policy, but are focused on how ECB's Lagarde will respond to the rise in yields.

Equities: Global equities rose 0.5% yesterday in another volatile day where the US inflation print showed how sensitive equity markets currently are to inflation and yields. For a change, defensives outperformed cyclicals while value was outperforming growth after a pause Tuesday. Tech stocks the only sector lower yesterday while energy stocks led the market higher. In US, Dow +1.5%, S&P 500 +0.6%, Nasdaq -0.04%), Russell 2000 +1.8%. Asian markets are broadly higher this morning led by the combination of cyclical value with South Korea rising roughly 2%. European and US futures are ~0.5% higher this morning.

FI: There was a modest decline in yields yesterday on the back of weaker than expected US inflation data. Spreads between the periphery and core were stable. The main event today is the ECB meeting. We do not expect much action from the ECB meeting as discussed in our ECB preview.

FX: Modest USD weakness extended in yesterday's session while real-rate sensitive currencies in ZAR, MXN, NOK and RUB were among the winners. EUR/SEK and EUR/GBP range traded in a session otherwise short of any major events.

Credit: CDS indices had a good run yesterday where iTraxx Xover closed in 247bp (-6bp) and Main in 48bp (-½bp). Like Monday, cash bonds were in less demand and IG ended ½bp wider while HY closed 1bp wider.