The week ahead: Rates market to remain in focus

Market highlights

• Negative vaccine news provides poor eye candy for oil
• Earning season lies in wait, but whispers that we’re nowhere at the end of the upgrade cycle are keeping a reasonable bid under the market
• Traders struggle to sit on a trend longer than 48 hours as FX turns transactional
• A glut of data and consequential speakers dot the week ahead

The week ahead

Equities were mixed to end the week, with China underperforming in Asia on a more substantial inflation print, primarily on higher commodity prices which have raised worries that the PBoC may reign in credit. Vaccine rollout and reopening timelines remain in focus, with Australia and the Philippines the latest Asian nations to limit the use of AstraZeneca's vaccine following blood clot findings. All of which is providing poor eye candy for oil. 

Broader macro indicators are mixed with the higher USD weighing on commodities along with Chinese PPI and tightening fears. At the same time, UST yields have retraced some of the last two days' gains, with the Federal Reserve’s Jerome Powell and James Bullard reiterating that they will not react to near-term inflation.

It's been a relatively busy week thanks to Chair Powell's dovish lathering as the market shifted from tantrum to tolerance. Indeed, the market is increasingly more comfortable with growth driving up yields.

Still, there seemed to be some mild pre-weekend profit-taking after China's inflation beats that rekindled some inflation concerns. After all, China is paying the inflation piper when it comes to higher commodity prices which were the most significant impacting factor in the China prints.

And there might be more than meets the eye to the fall in yields after all: who is buying this stuff?

The stabilization and subsequent decline of US Treasury yields may well be connected to foreign central banks' activities. The Fed's latest custody data shows that after three consecutive weeks of heavy net selling, the official sector turned a small net buyer of Treasuries in the last week.

Still, earning season lies in wait, but whispers hinting that we’re nowhere at the end of the upgrade cycle yet are keeping a reasonable bid under the market. Substantial operating leverage, a forceful rebound in consumer savings spending and fiscal stimulus provide the critical pillars of the recovery and drive earnings. So, there could be some basis for the market’s recent bullish madness.

Currency markets

It was a messy Friday as traders can't sit on a trend longer than 48 hours these days – especially as FX has turned very transactional, not to mention the air continues to leak out of the most popular reflation trades as vaccine rollout is fully priced in. The infrastructure deal is likely a colossal buy the rumour/sell the fact.

USDCNH continued to trade higher, likely on a combination of positioning – the latest Reuters positioning survey suggests the market has increased bets on long CNH - and outflows; there was interest in selling CNH against USD HKD due to outflow from onshore investment, hinting that CNH could remain weak against the basket.

GBP remains under pressure with intermittent waves of supply against the USD, EUR and JPY.

Price action has been transactional over the week, with exit velocity for the UK well priced and conversely underpriced for the EU, possibly leading to position adjustments amplifying the move at times and persistent tensions in Northern Ireland perhaps another drag on sentiment.

Events to take note of

• RBNZ (Apr 13) has its first meeting since the change to the housing remit; however, inflation and labour remain their two critical operational objectives and Governor Orr has gone out of his way to make this clear (BBG: “Orr: Solely focused on inflation, employment mandates”).
• A string of Fed speakers will continue after the uneventful meeting minutes – Kaplan (Apr 9), Harker (Apr 13), Daly (Apr 13/15), Powell (Apr 14), Clarida (Apr 14), Bostic (Apr 13/14/15) and Mester (Apr 13/15) – though the Fed narrative is on auto-pilot at the moment. Some banks expect US CPI (Apr 13) to surge, peaking in the May observation period before then pulling back.
• Other complex data includes Norway CPI (Apr 9), Canada Employment (Apr 9), US PPI (Apr 9), Sweden CPI (Apr 14), Australia Employment (Apr 14), US Retail Sales (Apr 15), US Industrial Production (Apr 15), and China 1Q GDP (Apr 15).
• For soft data, look for BoC 1Q Business Outlook (Apr 12), ZEW (Apr 13), Empire Manufacturing (Apr 15), Philly Fed Outlook (Apr 15), and UMich Sentiment (Apr 16).
• There are also 10y (Apr 12) and 30y (Apr 13) US Treasuries auctions next week in supply.