• Fink 🧠
  • Posts
  • Bonds Calm - Vaccinations, UK Budget & OPEC in focus

Bonds Calm - Vaccinations, UK Budget & OPEC in focus

Last week was pretty wild as volatility spiked into month end, and there is plenty to look forward to this week too.

Risk is back on so far with a positive session in Asia continuing in London...

Here's a rundown of some things that have caught my eye and what I'll be watching in the week ahead...

Fed speakers, yields & bond volatility

Bonds getting hammered last week didn't seem to bother the Fed too much.

If this was the 'taperless tantrum' as reported, the Fed checked their parenting manual, left the toddler screaming in the middle of the supermarket and walked away.

The result?

"Don't leave me! I'll be good, I'll buy those bonds right now, I promise"

Bonds were bought and yields fell back towards 1.4%.

Some have pointed to end of month as a partial culprit, but this bond story is unlikely to be a one-off.  

Extra detail on the 10Y here via ING:

But what now?

So far, Fed officials are parroting a version of this...

“the rise in yields is probably a good sign so far because it does reflect better outlook for U.S. economic growth and inflation expectations which are closer to the committee’s inflation target,”

Plenty of Fed speakers this week with Powell the clear standout, let's see if the script changes or if the relative bond market calm we've seen this morning continues and nothing needs to be said...

via Chris Weston (all times AEDT- add 13 hours for UK) Powell speaks at 17:05 Thursday

It wasn't just in the U.S. either - the RBA had to step in and defend their 3 Year yield 'peg' as markets began to cast doubt on the 'no hikes until 2024' stance...

Markets are really starting to question the viability of policy "set at pandemic-fear levels" when economic conditions appear to be improving dramatically - NAB economist Tapas Strickland in BBG's Weekly Fix.

The RBA doubled daily bond buying to $4b ahead of the policy meeting tomorrow, announcing that they would buy bonds ranging from November 2024 through to May 2028.

Yields were already beginning to fall back in line, and the RBA announcement sealed the deal...

 The RBA money printers produced the second-biggest drop in the Aussie 10-year in the last 19-years, down 27 bps.

The biggest ... when the world was in full pandemic panic last March. https://t.co/rnvpVbcyn6 pic.twitter.com/qMDZiEqQnr— Jim Bianco (@biancoresearch) March 1, 2021 

The economic data down under is encouraging, with job ads rising 7.2% in February...

 ANZ Australian Job Ads growth accelerated to 7.2% m/m in Feb, despite five-day lockdowns in WA and Vic. #JobAds is now 13.4% above its pre-pandemic level, equivalent to an additional 20,500 jobs being advertised on average per month. #ausecon @cfbirch pic.twitter.com/hhQDelIiAc— ANZ_Research (@ANZ_Research) March 1, 2021 

There is the question of whether real wages will keep up with the recovery though.

The RBA are likely to push back strongly against the recent optimism at tomorrow's meeting - there are reasons to be cheerful, but the recovery will take time.

Imagine raising rates sooner than promised and throwing all of these under the bus 👇

 Housing lending jumped 44.3% y/y in Jan, Australia's highest annual growth on record (since 2003). Owner occupiers are driving the recovery, with investors down to 38% of new loans (the lowest since 2009) despite strong investor lending growth. @AdelaideTimbrel @felicity_emmett pic.twitter.com/nXIM9bE6w3— ANZ_Research (@ANZ_Research) March 1, 2021 

The ECB also had to send out the cavalry at the end of the week, with Stournaras the most dovish of the bunch...

 - ECB's Stournaras Says ECB Should Accelerate PEPP Purchases

- There’s No Fundamental Justification For A Tightening Of Nominal Bond Yields At The Long End

- Governing Council Should Instruct Board At March 11 Meeting To Fight Unwarranted Tightening Of Financing Conditions— LiveSquawk (@LiveSquawk) February 26, 2021 

Traders don't seem to believe the sustained inflation narrative...Again via BBG Weekly Fix:

Looking at the breakeven curve below -- which shows the current curve in green relative to last month's shape in yellow -- it's clear how the main recent boost in inflation-adjusted yields has been in the five-year sector. This suggests traders see the consumer-price index peaking over a five-year horizon, and then subsiding to just above 2% over the longer time line.

Reflation vs Rates Repression battles are just getting started...

The increase in real yields saw gold dumped, and the next move from here depends on what the Fed does/doesn't do...

  • Push yields back down and gold should briefly shine again

  • Let yields rise a little further to reinforce the reflation story

It's hard to see inflation expectations increasing much further from this point, so I think gold should roughly follow bonds here.

Yields up, gold down & vice versa...

There are plenty calling for a 2% yield on the 10Y - the last time we saw 2% on the 10Y, gold was in the $1400s...

Worth re-visiting:

Chris Weston offers some reasoned/detailed thoughts here too

The Vaccine Trade(s)

Let's start with EURGBP...

There has been an epic short squeeze in EURGBP. I think this (0.8691) is an opportunity to go short as rate differentials suggest it should be near the lows, not the highs. TP 0.8561 - Brent Donnelly (HSBC)

Rate differentials as another tailwind, plus the ECB will be 'closely monitoring' yields again this week... (let's see if they've upped the bond purchases to back that up)

On the vaccine front, the UK has now vaccinated over 20 million people 🎉🥳

It's only the first dose in most cases, but that seems to be enough...

 You love to see it.

Vaccine effect clearer every day in the UK. Amazing how much faster hospital admissions & deaths are falling in older groups than younger.

These are on a log scale, so steepening descent means rate of decrease among vaccinated groups grows every day 📉💉😀 pic.twitter.com/qwa4slGc0f— John Burn-Murdoch (@jburnmurdoch) February 26, 2021 

Meanwhile, it's not got much better for the EU, and the grandstanding over the AstraZeneca jab has really hurt their vaccination efforts.

Ultimately they undermined confidence in the AZ vaccine, and this is the result in France:

Of 1.44 million doses of the AstraZeneca vaccine delivered to Germany’s 16 states, just 314,568 had been administered by yesterday – meaning 1.1 million doses were lying unused, according to official figure analysed by the Bild newspaper.

Another 650,400 were due to be delivered today.

Europe is now set to approve the AstraZeneca vaccine for use among the over-65s after the Scotland study, but they are already sooo far behind and the EU vax rate isn't catching up...

You know things are bad when this appears in The Guardian

Now, the U.S. is ramping up the vaccinations, ~2.4 million vaccines were administered just yesterday...

The U.S. vaccine supply is strong, so now it's a case of keeping this pace up...

 Another cut on this:

These amounts are enough to fully vaccinate 70m Americans per month.

Skipping the math, but if we vaccinated at that pace—plus accounting for people who have already been vaxxed—it would be enough to reach ~70% of the adult (age 16+) population by April 30. https://t.co/dbNrlXo0En— Nate Silver (@NateSilver538) February 28, 2021 

2.4 million daily vaccinations would see the U.S. reach the 70% herd immunity benchmark by the end of April!

Let's see if they can keep up the pace...

Back to the UK and Rishi's in the spotlight again this week...

UK Budget

Caution: May Contain Tax Hikes

Speculation is rife that the dreaded tax hikes are coming, but there's a lot more than that...

Telegraph

Borrowing has increased less than expected which gives Sunak some room to increase spending

Lloyds have put together a solid piece here (downloads as pdf) and conclude:

In fact, given the onerous longer-term challenges facing the fiscal outlook, this Budget provides the Chancellor with an ideal opportunity to present a strategic vision for rebuilding the economy and the public finances in a post-pandemic & post-Brexit environment based around these principles.

Something that would go some way to easing building concerns over the potential scale of any future fiscal consolidation that might take place once the recovery is established.

I completely agree.

Whatever he says about taxes, that vision is key.

Rishi is the Anti-Draghi of speakers...

If he shilled Bitcoin, we'd already be at $350k and Elon would be irrelevant.

Warning: the speech will get annoying...

but I'd back him to win the market over...

Any tax hikes are clearly not ideal, but corp tax increasing to 23/25% is only catching up to the pack.

Also wouldn't be surprising if Sunak announced a tax hike, only to add 'but it won't come into effect until 2022...' Ooooh the drama! Would certainly grab the headlines...

OPEC+ Meeting

We've already had our first OPEC sources headline ping through...

 OPEC is said to increase oil output by 1.6 mln BPD from April - Three OPEC sources.— Breaking Market News (@FinancialJuice) March 1, 2021 

Should be a fun week...

But, just how tight is the oil market?

Are the demand assumptions credible? 👇

 1. Thread

Here are reasons I see the physical oil market as nowhere near as tight as people believe it is

A) Tight market is usually equated to supply/demand balance + amount of spare capacity in market. At moment there is a huge amount of spare capacity that can return quickly— Big_Orrin (@Big_Orrin) February 28, 2021 

We're still trading narratives based on assumptions so broad agreement is as important (more?) as the specific b/d figures.

The assumption that OPEC+ can manage supply is keeping a floor under prices and chatter about 1.5million barrels coming back online has not phased the market so far.

The UAE's energy minister was stating the obvious yesterday:

"Whether the market can absorb an additional 1.5 million b/d of OPEC supply come April will depend on the success of the vaccine rollout, and how that impacts demand recovery,"

We can start pencilling in a cautious '✔' next to the Vaccine rollout success (so far), so focus will shift to the demand recovery...

 13. Therefore, demand is the critical,factor to a tight market and not supply. But demand unlikely to return to 2019 levels quickly due to remote working, airline demand, high oil price, high unemployment and weakness of economies.— Big_Orrin (@Big_Orrin) February 28, 2021 

 The oil demand trap #oil #OOTT pic.twitter.com/i63TNPFmHN— Anas Alhajji (@anasalhajji) February 27, 2021 

China's 'Two Sessions'

Not much to say that hasn't already been said here

As the market in general is not expecting a GDP target from the meetings, it would not come as a surprise if none were provided. A clear action plan on the top priorities would be more important for the market to evaluate the impact on industries and the whole economy. The worst-case scenario would be a lack of clear direction on how to achieve the objectives set by the Two Sessions, which would create market uncertainty and doubt.

We expect a clear roadmap for self-sufficiency of advanced technology and achieving carbon neutrality. And we expect some investment numbers and timelines from the Two Sessions. - Iris Pang ING 👇

 🇨🇳 Goldmans | China: “Two Sessions” preview pic.twitter.com/nKtDr4u4T6— PiQ (@PriapusIQ) February 25, 2021 

 "In 2012, the private sector accounted for 52% of [Chinese] bank credit, while the state sector received 32%. By 2016, this dramatically reversed, with the state sector receiving 83% of bank loans, while the private sector received only 11%."

(Dan Blumenthal)— Fritz (@Fritz844) February 28, 2021 

This debt backdrop is important to watch with China's former finance minister warning that China's fiscal risks are 'extremely severe' over the weekend...