Travel stocks rally, China PPI shrugged off for now

Morning Note

European markets opened mixed but broadly remain calm as they have for the whole week. Everyone’s waiting for signals on inflation – investors seem to be largely shrugging one from China today. Having led the way higher yesterday, the FTSE 100 is weaker today, whilst European indices are just in the green as they chop sideways ahead of tomorrow’s ECB and US CPI double-header. The Tiggerish outgoing chief economist of the Bank of England, Andy Haldane, said this morning that the UK economy is going gang-busters and inflation pressures are strong.


It was a mixed bag over the US in yesterday’s session as the Dow slipped a modest 30pts, the S&P 500 stayed flat as it struggles to make a new all-time high, and the Nasdaq rose 0.3%. The S&P 500 rose by less than 1pt to 4,227.26, a whisker below the record 4,238.04 reached on May 7th. 10yr Treasury yields slipped to 1.513%, the lowest level in a month. Remember payrolls data last week showed strong but not too strong job creation – enough to keep tapering talk at bay, or at least so the market seems to think. Yesterday’s huge JOLTS jobs openings report highlighted that the US economy is booming but a shortage of the right labour in the right places could a) force up wages and b) restrain growth (stagflation?). But, in the words of Mario Draghi, this is a ‘high class’ problem to have.


China’s producer price index, a key leading indicator of global inflation, rose at its fastest pace in 13 years as base effects from last year’s pandemic and a boom in commodity prices fed into higher prices paid by businesses. PPI in China rose at 9% in May, the highest it’s been since 2008, and a signal that inflationary pressures are not going away soon. It’s not a major surprise – expectations were for 8.5%: we know inflation is here right now. The question remains about the degree to which this is a transitory force or a lasting shift. There is another question: can companies pass these on to the consumer? If so, it runs the risk of stagflation; if not it could means slowing earnings growth. Does this favour the value trade still? We’ve seen a big rotation already, but growth and inflation this year ought to continue to be supportive. Cathie Wood of Ark thinks otherwise. “The rotation back to growth is probably close at hand,” she said at an Ark Invest webinar on Tuesday.  


Travel stocks popped up a touch on news the EU parliament has approved vaccine passports to ease travel this summer. We saw the likes of TUI, IAG, EasyJet and Ryanair all jump as the news broke on the wires. WH Smith also ticked higher, dependent as it is now on travel sales. SSP, the operator of food and beverage outlets in travel locations worldwide, should also be pleased. It reported a £300m loss this morning as revenues declined by almost 80%. Management say they don’t think sales will return to pre-Covid levels until 2024. Shares dropped at the open on the big loss but turned higher as the EU travel news broke. Meanwhile, the US eased travel restrictions for 61 countries, but not the UK. Nevertheless, there is a real sense that vaccines are working to open up the US, EU and UK to travel this summer, albeit not quite how it once was.

Oil pushed to fresh highs ahead of the EIA inventory report later and tomorrow’s OPEC monthly report. WTI drove on beyond $70 to mark an almost-three-year high overnight amid encouraging signs of demand recovery. Meanwhile fears of Iranian supply hitting the market later this year subsided after the US secretary of state Anthony Blinken said hundreds of sanctions would remain on the regime in Tehran, even if the two countries reach a nuclear deal. Whilst vaccines and the reopening of economies have left the market in deficit, helping to drive prices up 35% this year, the persistence of cases in some parts of the world combined with ongoing travel restrictions in Europe/US means there are still doubts about how quickly demand will recover this year.  Nevertheless, prices hit their highest since Oct 2018 after the API reported a draw of 2.1m barrels last week. 

Thursday sees the release of the latest OPEC monthly oil market report.  Last month’s report saw the cartel reiterate its belief in a strong recovery in world oil demand in the second half of 2021. This month’s report is not expected to show much change from the previous version, which said demand will rise by 5.95m bpd this year, up 6.6% from 2020 levels. Ahead of this, traders will look to today’s inventory report from the Energy Information Administration (EIA). Last week’s EIA inventory report showed stockpiles declined by 5.1m barrels, a larger-than-expected draw that helped to support the bullish view on oil prices as demand in the US recovers. Analysts expect a draw of 3.3m barrels to be posted today.

Elsewhere, Bitcoin trades at $34k after touching $31k yesterday. A SEC official expressed concern about the US financial regulator’s push to enforce stricter rules around cryptos. GBPUSD continues to hold below 1.42, but a breakout of the triangle to the upside needs to be monitored with MACD (1hr) crossover still supportive of a nudge up to 1.42 – failure at 1.4180 could beget a drop to the 1.4120 area.

Biden tax plan weighs on stocks, Bitcoin tumbles

Morning Note

European equity indices opened a tad lower on Friday morning after stocks fell on Wall Street on reports Joe Biden is planning to slap much higher capital gains taxes on the wealthy. This was always part of the equation when we looked at the implications of a Biden presidency, but markets have been pepped up on a mix of fiscal stimulus, the Fed’s extraordinarily accommodative stance, a strong cyclical impulse from the vaccine-led reopening and a bounce back in earnings. The major averages fell in lockstep, dropping by almost 1% , though the Russell 2000 ended the session flat as the selling was led chiefly by the longer-term growth names like Tesla and Amazon. The Dow Jones finished the day at 33,815, a decline of more than 300 pts. The S&P 500 closed down 0.92% at 4,134 and the Nasdaq Composite notched a similar decline to finish at 13,818. The FTSE 100 opened lower and is heading for a decline of more than 1% for the week. As of send time the CAC 40 had inched into the green. I would not describe risk as being offered as such; it’s been a pretty choppy week and I would be equally unsurprised if stocks turned around this afternoon and ended the week higher as I would if Wall Street led a sharp decline into the weekend.

The Biden administration is looking to raise the top marginal income tax rate to 39.6% from 37%, whilst also doubling capital gains tax to 39.6% for people earning more than $1 million. Tax the rich, hand it out to the poor. Sounds like furlough, but on a permanent basis. The big problem (one of many) in all this is the Senate – it would require support of all the Democrats in the upper chamber and this is far from assured. Stocks would probably be a lot lower if investors were really worried, and I think markets can overcome this move, even if it manages to pass through the Senate, which I don’t think it will. Nevertheless, coming off record highs and a good run up through the start of the year, the macro picture not really changing, rising Covid cases globally, strong earnings and other supportive factors largely priced in and the extent to which investors are ‘all in’ equities, we could be set for a downwards move in equities over the coming weeks. Beware seasonal factors (I dare not say ‘sell in May’…)

The economic picture continues to improve in the US. Initial claims for unemployment insurance fell to 547,000 last week, down from 576,000 the prior week and below the roughly 600,000 estimated. The number of continuing claims also fell.

Likewise, UK retail sales numbers were very positive in March as consumers opened their wallets ahead of the reopening of non-essential shops. Sales rose by 5.4% from February, well ahead of the 1.5% expected. Clothes, gardening goodies and specialist food items from bakers and butchers were in vogue.

Even Europe is showing immense resilience in the face of lockdowns – France’s Services PMI came in at 50.4 against 46.7 forecast, whilst the manufacturing survey surged to 59.12. The composite PMI rose to 51.7 from 50 previously, with the outperformance in services meaning it easily beat the 49.4 expected. Germany’s composite PMI came in at 56, still in expansion territory, but short of the 57 expected and down from the 57.3 in March.

The dollar is offered in early trade, with EURUSD jumping to 1.2050, Yesterday’s ECB presser high of 1.2070 is the main target for bulls. GBPUSD also tried to sustain a rally to 1.39 but hit resistance at 1.3890 and reversed a touch.

The euro remains steady following yesterday’s ECB meeting, which left markets on an even keel as the central bank managed to maintain its dovish stance and fend off chatter about wrapping up its emergency bond buying programme. Christine Lagarde played down any taper talk, saying this was ‘premature’ and that the recovery still has a long way to go. The yield on 10-year German bunds moved lower.

Bitcoin prices have tumbled. Spot trades under $48k this morning, meaning it’s down 25% from last week’s all-time high. The low tested several times in Feb at $44k is the big support. Basically, it seems to have been bid up on a lot of speculation (even more than usual) ahead of the Coinbase IPO and all this froth has evaporated like a lot of hot air. There has also been a cluster of regulatory reports and rumours that point to a clampdown and tighter regulation. JPMorgan analysts led by the closely-followed Nikalous Panigirtzoglou say the rollover in prices has been led by a steep liquidation in speculative futures positions. “Momentum signals will naturally decay from here for several months, given their still elevated level,” he says.

Shares in Coinbase are in for a hit should cryptos go further south. Also, Cathie Wood’s ARK Innovation ETF is still loading up on COIN – watch this one ,too. The Coinbase listing – the ultimate poacher-turned-gamekeeper moment – might have been the high watermark for Bitcoin.

I refer to two points we highlighted when Coinbase registered to go public:

1. Earnings are inextricably tied to crypto prices. This may be obvious, but it is interesting to see in black and white. “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.”

2. More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For the year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on the platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing.

Caveat emptor and all that.

ECB preview: Keep it simple

The European Central Bank (ECB) convenes today for its latest policy meeting. After last month’s word puke from Lagarde (“Financing conditions are defined by a holistic and multifaceted set of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign yields to corporate bond yields and bank credit conditions.”), we have spent several weeks trying to accurately assess where the ECB is really at in terms of responding to the changing economic outlook with regards the recovery from the pandemic, rising bond yields and higher inflation expectations. There is greater clarity now – it looks like the ECB is happy to let inflation run higher and only let bond yields move up if due to better growth: it’s now all about real yields. At the last meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point. The question about tapering PEPP should wait until June, and ending the programme may need to be discussed in September, but for now the ECB should be looking to keep it simple.

This ought to be a quiet one for the ECB, but the propensity for miscommunication is strong. Since the March 11th meeting, the selloff in sovereign debt and rally in yields cooled, before picking up some steam again. While German 10-year bunds are north of where they were at the time of the March meeting and close to the February highs, real rates remain at historic lows. This is what matters to the ECB more than nominal rates. Moreover, the economic data has not materially changed since the last meeting and there signs the largest economies are adapting to lockdown restrictions better than before and are more resilient. The latest Zew survey about the German economy shows investor sentiment at its highest in over a year. The head of the French central bank recently noted that economic activity is declining less than feared in April. Vaccinations, slow to start, are picking up pace and the EU should be on course to catch up the UK and US before too long.

So we look rather to the risk that a hawkishness creeps in. The ECB will need to be careful about getting itself tied in knots about when and how it will exit PEPP just yet, and whether a PEPP taper coincides with raising traditional asset purchases, and just what the reaction function is given it’s spent several weeks trying to clarify this since the last meeting. Now is not the time for such debates, however markets will look towards hawks becoming louder as inflation starts to pick up. Hawks are going to get more vocal if inflation starts runs higher over the next few months – the mandate is clear on this one. Lagarde will need to not sound overly confident about the recovery (why should she anyway?), or else risk letting markets latch on a timeframe for winding down PEPP.

And we should note that chatter about when is the right time to exit emergency mode is coming just as the ECB is looking at a potential change to the inflation mandate. Not content with a more symmetric target a la the Fed, it also wants to introduce inequality and climate change mandates…This only makes guessing the future path of monetary policy and the ECB’s reaction function even more muddy, which in turn may lead to some form of spike in yields and widening of spreads, which exactly what the ECB is seeking to avoid. Another reason to keep it simple tomorrow.

Tighter financial conditions ahead?

The ECB will also have to wrestle with the expectation of tightening financial conditions in the Euro area later this year. Banks and Eurozone banks expect to tighten access to credit in the second quarter, having already tightened in the first quarter. “This reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic and the progress in the vaccination campaign,” the ECB said, adding that loan demand is also faltering as companies postpone investments.

The ECB’s job is to make sure it doesn’t get dragged into a conversation about tapering PEPP and keep the markets happy until June when it will have much more data at its disposal and news on vaccinations will hopefully be much better. For this meeting, keep it simple is the order of the day.

EURUSD: Rejection of the 100-day SMA sets up today’s retest of the 1.20 round number support. Ultimately the ECB may not be the main driver of the pair right now and more exposed to broader risk sentiment and Treasury yields impacting the USD momentum.

Week Ahead: ECB speaks amidst vaccine pressure

Week Ahead

Rate statements from the European Central Bank and Bank of Canada are this week’s big stories. Will we see any major policy tweaks? UK retail sales are also in focus as the country emerges from lockdown. Elsewhere, earnings season rolls on on Wall Street.

Vaccine rollout puts pressure on ECB ahead of press conference

Another month, another ECB press conference.

The European Central Bank is, again, unlikely to make any major policy changes this month.

Instead, we’re probably looking at how the bank plans on keeping things steady. The big issue facing economic recovery is still vaccine rollout throughout the EU. At least, it looks like a key concern for ECB bigwigs according to March 11th’s meeting minutes.

The minutes underline ECB council members’ feeling that near-term economic growth depends on how the pandemic evolves.

“Reference was made to the slow pace of vaccination compared with other parts of the world,” the minutes stated. “Questions were raised as to how realistic it was to assume that containment measures would be reduced as early as the second quarter. Weakness in activity might continue well into the second quarter and beyond.”

There is a feeling that persistently high Covid-19 infection rates across Europe, spread of mutant strains, and prolonged lockdown restrictions are negatively the bloc’s recovery. GDP growth may come in lower than previously forecast in the next quarter too.

That said, the base rate probably won’t rise. Keeping borrowing costs low for banks throughout the EU is also a top priority, as the recent ramp in bond yields colours policymakers’ decision making.

Governing council member and Dutch central bank president Klaas Knot has said he doesn’t want to see a run up on government bond yields, as this may lead to a tightening of economic conditions throughout the EU. As the bloc recently committed to increase its bond buying programme, this is something the central bank will be very keen to avoid.

Are policy tweaks ahead as Bank of Canada makes rate statement?

Another rate decision will be coming from the Bank of Canada this week. Chances are no major changes are coming to Canadian rate policy, but we might some tweaks.

One thing that is unlikely to change is the BOC’s policy rate, which is pretty much frozen at 0.25% until 2023 when economic slack is absorbed.

Instead, Canada’s central bank is exploring changes to its policy frameworks, including average inflation targeting, a dual mandate targeting employment and inflation together, nominal GDP targeting, and price-level targeting.

This comes after it appears consumers and banks are feeling calm, despite historically low interest rates.

“Overall, inflation has not become a bigger concern for Canadians, and the pandemic has not dramatically changed consumers’ views on inflation,” the BOC said in its latest quarterly survey of consumer expectations, published on April 12th.

“Canadians are cognizant that inflation hurts others differently,” Governor Macklem said. “That is informing our research agenda. We are working with Statistics Canada on getting measures of inflation that are targeted more to specific groups. That has come directly out of speaking with Canadians.”

One thing we do know is that the bank is considering tapering off its quantitative easing programme, so we may see a more concrete strategy regarding this with the latest rate statement.

UK retail sales look to post strong March gains

The UK has opened non-essential shops, so we’re probably bracing for a bit of a boom when April’s stats roll in. March’s month-on-month retail sales are reported this week, and indicators look like retail is still strong, despite the pandemic’s challenging conditions.

We can see two-year increases in the latest reports from the British Retail Consortium and KMPG monthly sales monitor. This report is released ahead of month-on-month stats which come out this week but will give an indicator to the state of the UK’s retail health.

For context, the IRC has decided to compare sales data from 2019 and 2021 due to the disruption caused by the pandemic in 2020.

UK retail sales increased 8.4% on a like-for-like basis from March 2019, when they had decreased 1.1% from the preceding year.

Over the three months to March on a two-year basis, in-store sales of non-food items declined 44.4% on a total and 44.0% on a like-for-like basis. This is worse than the 2019 Total average decline of 3.1%.

For March, the two-year like-for-like excluding temporarily closed stores remained in decline. This is probably to be expected. Until last week, UK non-essential shops had been shuttered, so the high street has pretty much been dead.

Online sales continued to grow quickly during March, the final month of lockdown 3.0. The BRC says almost 60% of sales were online during the month. IMRG, which is continuing to compare 2021 figures with those of 2020, says that in March, online sales were 71.7% up compared to the same time last year.

We’ll be able to see more on a month-by-month basis when data is released this week.

Wall Street earnings season rolls on

After the big banks kicked off proceedings last week, earnings season is in full swing on Wall Street. The large caps are circling, and they’re bringing reports with them.

We’ll be able to see with more clarity which companies continue to be pandemic winners, and which may have struggled in the tough conditions it threw up.

Amidst the large caps reporting this week are Coca-Cola, Johnson and Johnson, Intel, Netflix, SAP, and a host of others. See below for a roundup of the large caps sharing earnings reports this week.

Major economic data

Date Time (GMT+1) Currency Event
Tue 20-Apr 11.45pm NZD CPI q/q
Wed 21-Apr 2.30am AUD Retail Sales m/m
7.00am GBP CPI y/y
1.30pm CAD CPI m/m
  3.00pm CAD BOC Monetary Policy Report
3.00pm CAD BOC Rate Statement
3.00pm CAD Overnight Rate
3.30pm USD Crude Oil Inventories
4.00pm CAD BOC Press Conference
Thu 22-Apr 12.45pm EUR Main Referencing Rate
12.45pm EUR Monetary Policy Statement
1.30pm EUR ECB Press Conference
1.30pm USD Unemployment Claims
3.30pm USD US Natural Gas Inventories
Fri 23-Apr 7.00am GBP Retail Sales y/y
8.15am EUR French Flash Services PMI
8.15am EUR French Flash Manufacturing PMI
8.30am EUR German Flash Manufacturing PMI
8.30am EUR German Flash Services PMI
9.00am EUR Flash Manufacturing PMI
  9.00am EUR Flash Services PMI
9.30am GBP Flash Manufacturing PMI
9.30am GBP Flash Services PMI


Key earnings data

Date Company Event
Mon 19-Apr Coca-Cola Q1 2021 Earnings
IBM Q1 2021 Earnings
Prologis Q1 2021 Earnings
United Airlines Q1 2021 Earnings
Tue 20-Apr Johnson & Johnson Q1 2021 Earnings
Proctor & Gamble Q3 2021 Earnings
Netflix Q1 2021 Earnings
Philip Morris Q1 2021 Earnings
Lockheed Martin Q1 2021 Earnings
Wed 21-Apr ASML Q1 2021 Earnings
NextEra Energy Q1 2021 Earnings
Anthem Inc. Q1 2021 Earnings
Canadian Pacific Railway Co. Q1 2021 Earnings
Ericsson Q1 2021 Earnings
Thu 22-Apr Intel Corp. Q1 2021 Earnings
AT&T Q1 2021 Earnings
Union Pacific Q1 2021 Earnings
Snap Inc. Q1 2021 Earnings
Blackstone Q1 2021 Earnings
LG Chem Q1 2021 Earnings
Volvo AB Q1 2021 Earnings
Fri 23-Apr Industrial & Commercial Bank of China Q1 2021 Earnings
Agricultural Bank of China Q1 2021 Earnings
Honeywell Q1 2021 Earnings
Bank of China Q1 2021 Earnings
PetroChina Q1 2021 Earnings
American Express Q1 2021 Earnings
Daimler Q1 2021 Earnings

Let’s just call it the weekend

Morning Note

Britain’s economy contracted less than expected in January, but nevertheless showed the dire impact of lockdown on economic activity. The European Central Bank said it would speed up the pace of bond buying to lean against the rise in yields but didn’t provide an awful of clarity overall. Wall Street rose to a fresh record and Bitcoin made a new all-time high as investors looked to the imminent arrival of stimulus cheques. European stocks move a little lower in early trade on Friday despite a new record high on Wall Street for the S&P 500. However, the main bourses are on track for a roughly 4% gain this week, while the FTSE 100 is up a little over 1%.

A 30-year bond auction in the US went off without too much trouble in the end. Nevertheless, US 10-year yields have popped back to 1.6% a level that has elicited some concern of late. Meanwhile, Britain’s chancellor, Rishi Sunak, warned that “the public finances are much more sensitive to changes in interest rates and inflation than they were previously”. Quite. The more you are in hock the more ‘sensitive’ you are to rates. But equally, if you have a central bank that will hoover up at auction, you don’t need to worry about the market rate…but that is a debate for another day. It seems the UK government is intent on making sure the public finances get ‘fixed’, whatever that means. (it means higher taxes for you and me, is what it means, so we can afford to pay people not to work).

“Financing conditions are defined by a holistic and multifaceted set of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign yields to corporate bond yields and bank credit conditions.” Holistic and multifaceted…woooweee!! That sounds so clever. The ECB, well, did what the ECB does. Little clarity and a lot of complexity – flexibility – around its reaction function. Christine Lagarde spent a long time trying to explain what the ECB is trying do by saying it will increase the pace of bond purchases; partly because it’s a bit unclear about what it wants to achieve and partly because Lagarde is not a master of the press conference like Draghi. The ECB will speed up asset purchases, but it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. Which sounds like it has no clue: flexibility is good, but it must be a little more in control of things than this.

The sensitivity to rates is extraordinary. Cue the headline: “European bonds rally after ECB pledges to step up asset purchases”. Get this – the yield on 10-year bunds slipped 0.02 percentage points – a whole two basis points! That is quite a reaction, I mean talk about bond vigilantes…I joke of course…

Gold failed at the $1,740 area and has retraced the last few days’ gains as yields climbed again.

Gold failed at the $1,740 area and has retraced the last few days’ gains as yields climbed again.

Week Ahead: ECB speaks, US CPI released & BoC makes statement

Week Ahead

We’ve a busy week ahead for European economics with the ECB press conference and rate statement. Are changes to economic policy coming to halt steepening yields? In the US, CPI data is released, gauging the effects of inflation. The Bank of Canada will also be making its overnight rate statement, and a strong economic outlook for Canada could mean a change in bond-buying policy. 

Will ECB tweak its bond buying programme to tackle steepening yields? 

Bond yields have coloured a lot of monetary policy talks in recent weeks, and we’ll be looking to the European Central Bank’s response to steepening curves in this week’s ECB statement and press conference. 

We’ve previously seen Executive Board Member Fabio Panetta make the case for continuing bond purchases and keeping financial support going while the pandemic continues. 

“The steepening in the nominal GDP-weighted yield curve we have been seeing is unwelcome and must be resisted. We should not hesitate to increase the volume of purchases and to spend the entire PEPP envelope or more if needed,” Panetta said on Tuesday 2nd March. 

“Policy support will have to remain in place well beyond the end of the pandemic,” he added. “Risks of providing too little policy support still far outweigh the risks of providing too much. By keeping nominal yields low for longer, we can provide a strong anchor to preserve accommodative financing conditions.” 

Despite this, we saw a slowing in the ECB’s bond-buying programme on Monday 1st March. Then, the Bank had settled €12bn in bond purchases, against €17.5bn the previous week. The decline is due to much higher redemptions, Bloomberg reports. A sign of a policy readjustment to come perhaps? 

This may run counter to Panetta’s wishes: “We must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.” 

We have ways to react to this,” Jens Weidmann, Governor of Germany’s Bundesbank, told CNBC. “The PEPP comes with flexibility and we can use this flexibility to react to such a situation.” 

The EU’s emergency bond buying programme will last until March 2022 as it stands, with total purchases coming in at €1.85tn. Weidmann indicated that the ECB may step up purchases again in the wake of rising yields. 

“This is one element that is on the table, to use the flexibility we have in implementing the PEPP,” Weidmann said. “But again, the first step is to analyse the root causes and also to see what effect we have on our ultimate objective which is price stability.” 

Yields and the ECB’s response will take centre stage when it makes its next announcement on March 11th. 

US CPI, yields, and inflation

We’ll also get to see if inflation is really starting to bare its teeth in the US with the release of the latest Consumer Price Index (CPI) report from the Bureau of Labor. 

Rising US bond yields have essentially been the talking point for the last couple of weeks, as they have affected financing global. Yields on the benchmark US 10-year Treasury Note passed 1.3% on February 17th and have since jumped to almost 1.6%. 

Yields tend to rise with inflation expectations as bond investors become less inclined to sit on low or negative-yielding assets in real terms. Higher yields can also mean more debt servicing for major firms. This tends to knock stock markets as traders reassess the environment for investing.  

Prior to this, January’s CPI actually showed a retraction, when inflation declined to 0.3%. Year on year, the CPI stayed flat at 1.4%. Core CPI, which excludes volatile food and energy prices, edged lower to 1.4% in January from 1.6% in December and came in lower than the market expectation of 1.5%. 

Price pressures are likely to have been stronger in February.  

The higher yields and inflation levels are also being watched under the context of further stimulus. Joe Biden’s $1.9 trillion package is very likely to be passed soon, which will induce, it’s hoped, more spending and consumption throughout the US economy. With more readily available cash, inflation may edge higher. 

There’s a lot to be gleaned from this month’s US CPI release. 

BoC rate statement – no major changes expected 

The Bank of Canada will set out its latest rate policy this week. Could we see an easing of economic support? Preliminary GDP reports suggest Canada’s economic outlook is relatively healthy, so a reduction in bond purchases could be on the horizon.  

In a January press release, Canada’s central bank stated it will hold current level of policy rate until its inflation objective is achieved, while continuing its quantitative easing programme, purchasing CAD$4bn worth of bonds each week. 

However, Canada’s latest GDP figures show a resilient economy. The Canadian economy grew at an annualized rate of 9.6% in the fourth quarter, data from Statistics Canada showed on Tuesday March 2nd, beating analyst expectations of 7.5%. 

Interest rates are likely to stay at near-zero until 2023. Mortgage rates have started to creep up, however, in response to steepening yield curves, but the base rate will stay low for another couple of years, says BoC Governor Tiff Macklem. 

Despite some observers believing the stronger economic outlook maybe about to signal a cut in bond purchases, BoC has sped up purchases of provincial bonds as part of an overall strategy to counter rising yields, as well as provide more liquidity to provinces to bolster its economy against the ongoing Covid-19 pandemic. 

The central bank bought CAD$436.5 million of bonds via its Provincial Bond Purchase Program last week – the most since the start of that effort in May 

Like all economies, though, it’s probably unlikely that Canada will make any seismic changes during when it makes its rate statement decision on March 10th 

Major economic data 

Date  Time (GMT  Currency  Event 
Wed 10 Mar  1.30pm  USD  CPI m/m 
  1.30pm  USD  Core CPI m/m 
  3.00pm  CAD  BoC Rate Statement 
  3.30pm  CAD  Overnight Rate 
  3.30pm  USD  US Crude Oil Inventories 
Thu 11 Mar  12.45pm  EUR  Main Refinancing Rate 
  12.45pm  EUR  Monetary Policy Statement 
  1.30pm  EUR  ECB Press Conference 
Fri 12 Mar  1.30pm  CAD  Employment Change 
  1.30pm  CAD  Unemployment Rate 


Key earnings data 

Date  Company  Event 
Tue 09 Mar  Deutsche Post  Q4 2020 Earnings 
  Continental  Q4 2020 Earnings 
Wed 10 Mar  Oracle  Q3 2021 Earnings 
  Adidas  Q4 2020 Earnings 
  LUKOIL  Q4 2020 Earnings 
  Legal & General  Q4 2020 Earnings 
  Campbell Soup  Q2 2021 Earnings 
  Prada  Q4 2020 Earnings 
Thur 11 Mar  Rolls Royce  Q4 2020 Earnings 

Sunak says no MMT (magic money tree), risk retreats into the weekend again

Morning Note

No magic money tree: Rishi Sunak, the UK Chancellor, has told Conservative MPs that he wants to wean the country of stimulus and restore the public finances. Apparently, the chancellor will use the March Budget to start reducing the deficit and raise taxes, with a focus on corporation tax at first. The government must be confident about vaccines to allow the focus to turn to tax hikes. Compare this with his US counterpart Janet Yellen’s calls to act ‘big’, and it looks as though the Tories are falling into the old austerity-mantra trap. Or are they? We should note, cynically, that it is never about doing what’s right for the country, only about getting re-elected. So, keeping the lid on spending, being ‘responsible stewards’ of the public finances and showing they are not spendthrifts like the other lot, is all terribly important. Only it may not be the right course of action for the people of this country. It’s going to take a long time to repair the damage of the government’s actions to destroy the economy. Perhaps some MMT’ers should start making their case a little more vocally? It would be an interesting debate to have in Britain, one that so far has only really focused on the US. 


PMIs this morning show confidence is holding up just but remains susceptible to further extensions to lockdowns. UK retail sales in December were weaker than forecast and consumer confidence has slipped. Retail sales rose just 0.3% last month from November, when sales dropped 3.8%. This compared with an expected rise of 1.2% and indicated that restrictions are not just physical. The GfK consumer confidence index eased down 2pts to –28 as people worry about their finances and those of the wider economy (quick Rishi, all that borrowing needs to be repaid quickly!). Sterling retreated in early trade, with GBPUSD easing back from the 1.37 level having traded through 1.3740 in yesterday’s session.


European stocks head into the weekend on a down note markets continue to search for direction amid the uncertainty of the pandemic recovery. Stocks on Wall Street were flat for the session, although the Nasdaq rose 0.55%, building on Wednesday’s record high, as investors bet on big tech delivering bumper earnings in the wake of the Netflix bounce. Apple shares rallied over 3% ahead of next week’s earnings, with quarterly revenues seen exceeding $100bn for the first time on renewed iPhone demand and other devices delivering strong gains. It’s similar to last Friday with risk coming off into the weekend – not a great sign of confidence, and whilst remaining constructive on the big picture thanks to stimulus and vaccines, it’s very possible there is some kind of corrective move lower in major indices over the next few weeks.


Jobless claims in the US continued to show the need for targeted stimulus. Initial claims totalled 900,000 last week, slightly lower than expected and down from 926,000 in the prior week. Continuing claims fell 127,000 to 5.05 million. 


The ECB left everything on hold as expected. There was a change to the statement around recalibrating PEPP that ruffled some feathers but really was nothing to note – Lagarde and co have been saying this since the last meeting and only affords the ECB the kind of optionality we fully expect it to maintain.  But it did help push EURUSD higher and this morning it’s trading at week highs north of 1.21750.


The statement featured the following lines that were not present before: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.”  So PEPP could be smaller or larger, it all depends on financing conditions. Could go up. Could go down. This is not a new thing but a reiteration of what Governing Council members have been saying since the last meeting. You could argue it’s a slight sop to the hawks as it means they could reduce the PEPP envelope – or not use if fully – but really this is not a material change.


Chart: Gold retreated from the 21-day SMA and is back testing the 50-day SMA support.


 Gold retreated from the 21-day SMA and is back testing the 50-day SMA support

ECB says PEPP could expand, could shrink

The ECB left everything on hold as expected. There was a change to the statement around recalibrating PEPP that ruffled some feathers but really was nothing to note – Lagarde and co have been saying this since the last meeting and only affords the ECB the kind of optionality we fully expect it to maintain. 


The statement featured the following not present before: “If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.” 


So PEPP could be smaller or larger, it all depends on financing conditions. Could go up. Could go down. This is not a new thing but a reiteration of what Governing Council members have been saying since the last meeting. You could argue it’s a slight sop to the hawks as it means they could reduce the PEPP envelope – or not use if fully – but really this is not a material change and should not be a big surprise to the market. As ever, though, small hints from central banks can be latched on by particular market participants as a sign of something bigger to come.


Otherwise it’s as you were in terms of rates and PEPP and APP size, duration and reinvestments; and this should hopefully be a non-event with the Lagarde presser coming up. 


The euro likes it: EURUSD shot up to 1.2160 to a week high. 

Week ahead: ECB press conference, Joe Biden enters White House and earnings season rolls on

Week Ahead

Looking forward to next week, the ECB holds its first meeting and press conference for this year. Is inflation heading the EU’s way? Elsewhere, earnings season continues with more and more large caps reporting earnings and Joe Biden finally enters the White House as the Trump era finally comes to an end. 

First ECB meeting  of 2021 

The ECB holds its first meeting and press conference of 2021 on Thursday 21st January against a backdrop of heightened stimulus and a warning for governments to not to be too hasty when retightening their post-lockdown belts. 

Christine Lagarde, ECB President, has warned to avoid against reacting swiftly against any improvement in economic conditions this year if inflation starts to bite. Speaking on Wednesday 14th January, Lagarde predicted a rebound due to “pent up demand” but said this wouldn’t be enough to warrant a major readjustment in monetary policy as this could lead to serious risks. 

The pandemic has led to a sharp rise in household savings across Europe with a corresponding drop in services activity like restaurants, holidays and trips to the cinema. This has contributed to downward pressure on prices precipitated by lower energy costs and VAT cuts in countries like Germany. As such, the ECB inflation rate dropped in the negative in the final months of 2020.  

Another deflation cause is the strengthening of the EUR against USD, which has hit three-year highs recently. Import prices are lower, while exports are higher. 

Prices may start to track higher in the coming months, according to ECB forecasts. Its latest eurozone forecasts suggest consumer price inflation will reach 1% in 2021, and 1.3% by 2023. 

In December 2020, the ECB expanded its main stimulus policy. Its emergency bond-buying programme increased €500bn to €1.85tn. The ECB also readjusted its economic forecasts, cutting them in response to the pandemic’s resurgence across Europe. 

The central bank now predicts a pan-EU growth rate of 3.9% in 2021, factoring in longer lockdown measures. However, it did say that any lockdowns post-March could have severe economic affects. Germany’s latest GDP figures show a 5% contraction, so if the bloc’s biggest economy is suffering, what will the knock-on effect be for the rest? 

Earnings season continues on Wall Street 

Earnings season continues in earnest as the large caps continue a steady stream of Q4 2020 reports. 

US big banks kicked things off last week, with JPMorgan Chase, Citigroup, and Wells Fargo giving their initial reports. This week will see a more varied approach as large cap companies and blue chips across all sectors report. 

Netflix is one of the earnings to watch this week. The market expects the streaming service to deliver a year-on-year increase in revenues, but last quarter’s reports only just beat market expectations. Q3 EPS was significantly below forecasts, at $1.74 against the $2.12 analysts expected. Will this be the case again? Asia-Pacific has been the key growth market for Netflix in the lockdown world, so it’ll be interesting to see if the streamer has been able to build on its earlier gains there while offsetting any potential drops in other geographies. 

Joe Biden inauguration 

President-elect Joe Biden becomes President Joe Biden on January 20th, drawing a line under the Trump presidency. Four years since the billionaire reality TV star took the White House, America is as divided as ever. Could Biden prove the emollient the United States requires to become a little more united once again? 

At the time of writing President Trump is accused of allegedly instigating the recent Capitol Building riots with inflammatory rhetoric and is about to be hit by his second impeachment trial of his term. No US President has ever been impeached twice during their term. Even with under a week to go for his full term, Trump could be removed from office and may even face criminal charges – an ignominious end to an sometimes less-than-dignified presidency. 

But what about the start of the Biden era? How will markets react? There are several factors to watch out for as Biden starts his term, such as: 

  • Fiscal stimulus – Investor confidence could be bolstered by potential stimulus packages Biden is expected to introduce. He has vowed “trillions” in stimulus once he enters the White House. The Federal Reserve could also continue giving major supports to markets during the new era’s first couple of weeks. 
  • Foreign trade – Biden is expected to take a multi-lateral approach to foreign trade, and his policies could be more reconciliatory compared with Trump’s more chauvinistic approach.  
  • Covid-19 – After a laissez-faire approach to pandemic control Trump’s administration deployed, Biden is said to favour a more hands-on approach. His plans include a speedier vaccine rollout, a more detailed plan to get children back into school and asking all Americans to wear masks for the first 100 days of his term to combat the virus spread. Essentially, measures to make it so more citizens can get back to work and get the economy rolling again. 

Upon Joe Biden’s election in November, the S&P500 rose 5.2%. Will his inauguration cause the same positive bump for this index? 

Major economic data 

Date  Time (GMT)  Currency  Event 
Mon Jan 18  2.00am  CNH  GDP q/y 
Tue Jan 19  7.00am  EUR  German Final CPI m/m 
Wed 20 Jan  7.00am  GBP  CPI y/y 
  1.30pm  CAD  CPI m/m 
  3.00pm  CAD  BOC Monetary Policy Report 
  3.00pm  CAD  BOC Rate Statement 
  3.00pm  CAD  Overnight Rate 
  Tentative  CAD  BOC Press Conference 
  Tentative  USD  President-Elect Biden Speaks 
Thu Jan 21  12.00am  AUD  Employment Change 
  12.00am  AUD  Unemployment Rate 
  Tentative  JPY  BOJ Outlook Report 
  Tentative  JPY  Monetary Policy Statement 
  12.45pm  EUR  Main Referencing Rate 
  12.45pm  EUR  Monetary Policy Statement 
  1.30pm  EUR  ECB Press Conference 
  1.30pm  USD  Unemployment Claims 
  9.45pm  NZD  CPI q/q 
Fri Jan 22  7.00am  GBP  Retail Sales m/m 
  8.15am  EUR  French Flash Services PMI 
  8.15am  EUR  French Flash Manufacturing PMI 
  8.30am  EUR  German Flash Manufacturing PMI 
  8.30am  EUR  German Flash Services PMI 
  9.00am  EUR  EU Flash Manufacturing PMI 
  9.00am  EUR  EU Flash Services PMI 
  9.30am  GBP  Flash Manufacturing PMI 
  9.30am  GBP  Flash Services PMI 
  1.30pm  CAD  Core Retail Sales m/m 
  1.30pm  CAD  Retail Sales m/m 
  2.45pm  USD  Flash Manufacturing PMI 
  2.45pm  USD  Flash Services PMI 
  3.30pm  USD  Natural Gas Storage 
  4.00pm  USD  Crude Oil Inventories 


Key earnings data 

Date  Company  Event 
Tue Jan 19  Bank of America Corp.  Q4 2020 Earnings 
  Netflix Inc.  Q4 2020 Earnings 
  Charles Schwab  Q4 2020 Earnings 
  Goldman Sachs  Q42020 Earnings 
  State Street Corp.  Q4 2020 Earnings 
  Halliburton Co.  Q4 2020 Earnings 
  Logitech S.A.  Q3 2021 Earnings 
  J.B Hunt Transportation Services Inc.  Q4 2020 Earnings 
  Larsen & Toburo Infotech Ltd.  Q3 2021 Earnings 
Wed Jan 20  Procter & Gamble Co.  Q2 2021 Earnings 
  UnitedHealth Inc.  Q4 2020 Earnings 
  ASML NV  Q4 2020 Earnings 
  Morgan Stanley  Q4 2020 Earnings 
  U.S. Bancorp  Q4 2020 Earnings 
  Bank of New York Mellon  Q4 2020 Earnings 
  Kinder Morgan Inc (P)  Q4 2020 Earnings 
  Fastenal Co.  Q4 2020 Earnings 
  Discover Financial Services  Q4 2020 Earnings 
  Citizens Financial Group Inc.  Q4 2020 Earnings 
  United Airlines Holdings Inc  Q4 2020 Earnings 
Thu Jan 21  Intel Corp.  Q4 2020 Earnings 
  Costco Wholesale Corp.  Q4 2020 earnings 
  Union Pacific Corp.  Q4 2020 Earnings 
  IBM Corp.  Q4 2020 Earnings 
  Intuit Inc.  Q4 2020 Earnings 
  Intuitive Surgical Inc  Q4 2020 Earnings 
  CSX Corp.  Q4 2020 Earnings 
  BB&T Corp.  Q4 2020 Earnings 
  Investor AB   Q4 2020 Earnings 
  Travelers Inc (Travelers Companies)  Q4 2020 Earnings 
  Sandvik AB  Q4 2020 Earnings 
  Fifth Third Bancorp  Q4 2020 Earnings 
  Northern Trust Corp.  Q4 2020 Earnings 
  M&T Bank Corp.  Q4 2020 Earnings 
  Woodside Petroleum Ltd.  Q4 2020 Earnings 
  KeyCorp  Q4 2020 Earnings 
  Baker Hughes Inc.  Q4 2020 Earnings 
Fri Jan 22  Schlumberger N.V. (Ltd)  Q4 2020 Earnings 
  Kia Motors Corp.  Q4 2020 Earnings 
  UltraTech Cement Ltd  Q4 2020 Earnings 
  Kansas City Southern  Q4 2020 Earnings 
  HDFC Standard Life Insurance Company Ltd Registered Shs  Q3 2021 Earnings 
  Regions Financial Corp.  Q4 2020 Earnings 
  Huntington Bancshares Inc.  Q4 2020 Earnings 
  Ally Financial Inc  Q4 2020 Earnings 
  Gjensidige Forsikring ASA  Q3 2021 Earnings 

No Brexit breakthrough, Ocado raises guidance, ECB set to ease again

Morning Note

• European stock markets rise despite a tough session on Wall Street led by a sharp decline in big tech
• Sterling lower as Brexit talks hit brick wall after Boris Johnson and Ursula von der Leyen failed to bridge the gap over dinner
• ECB set to expand and extend emergency asset purchases, US inflation also on tap

The darkest hour is just before the dawn: There was no across-the-table breakthrough on Brexit over dinner last night, after a dinner date between Boris Johnson and Ursula von der Leyen only served up disappointment with a side of ennui. The gaps remain – a Sunday deadline has been set but the chances of a deal being struck are clearly diminishing over time – the acceleration towards the deadline was supposed to create the necessary urgency to land a deal. Looking at the talks from the outside, it seems as though no-deal odds are shortening fast. But we should caution that this is to be expected – the nature of the brinkmanship being pursued by both sides means a deal always seems further away than it may be in reality and will seem furthest away just when it’s within striking distance.

GBPUSD moved lower overnight, dropping from yesterday’s peaks above 1.3470 to test support at 1.33. The lack of any significant moves betrays the fact traders think both outcomes – deal or no-deal – are still very much in the running. This week’s lows at 1.3225 are in sight if 1.330 cracks.

Sterling was also under the cosh as UK GDP figures showed growth slowed to 0.4% month-on-month in October. It was the sixth consecutive month of growth but the rate is slowing down. GDP in October was 23.4% higher than April but the economy remains 7.9% smaller than it was in February 2020, before the full impact of the coronavirus pandemic, and 8.2% smaller year-on-year. Lockdowns in November will not help the overall Q4 picture but markets are only looking ahead to a post-covid world these days, thanks to vaccines.

Wall Street suffered a bruising session, with the Dow and S&P 500 closing down despite striking record highs early in the session. The Nasdaq tumbled 2% as tech stocks took a beating on concerns about a regulatory push in the US. Facebook dropped 2% as the Federal Trade Commission and 48 states filed two antitrust lawsuits against the company centring on its acquisition of Instagram and Whatsapp and what is seen as anticompetitive conduct. New York attorney Letitia James, who is leading the coalition of states, said that ‘Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition’. It’s a shot across the bows of big tech – Google, Facebook, Apple all fell a similar level. Regulatory overhang may be a drag on valuations.

But if there were doubts about the market’s appetite for new supply and investors’ willingness to pay a premium for growth, these were certainly dashed yesterday by a remarkable IPO for DoorDash. Shares priced initially at $102 closed the day 86% higher at $189.51. Airbnb goes today and if the DoorDash trading is anything to go by, there could be fireworks again. The company has priced its initial public offering at $68, well above the $44-$50 range estimated only last week.

Revenue growth was slowing for years and it’s never turned an annual profit, but Airbnb has not done as badly as peers during the pandemic and to some extent has made the private getaway more appealing than staying in a hotel/resort. The company made a profit of $219 million in the third quarter, on $1.34 billion in revenue. However, Experiences have not done as well as hoped – there was no breakout of the figures in the filing despite launching four years ago. The outlook is much stronger for 2021 now that vaccines are coming. Having been relatively resilient during the pandemic, Airbnb could kick on and benefit from the get-and-out-travel trend in 2021. Anyone for new highs for the Renaissance Capital IPO ETF?

European markets opened tentatively higher despite the drag from Wall Street and Brexit worries – sentiment remains broadly well supported due to the vaccines. Investors still largely positive on equities and on the whole probably believe that both a Brexit deal and US stimulus package will appear. The FTSE 100 was up 0.4% and testing the 6,600 level again in the first hour of trade on Thursday.

Ocado shares dropped 3% despite raising full-year earnings guidance as revenue growth slowed. Retail revenues rose 35% in the fourth quarter, down from 52% in the preceding quarter. Whilst still very strong, investors are perhaps just booking some profits now on the news. Having previously raised its full-year EBITDA guidance from £35m to £60m, management has again raised its outlook to £70m thanks to a very strong November led by continuing shift to online and lockdowns creating a perfect storm of demand for internet supermarkets. A lot of the immediate questions asked of Ocado have been answered and remaining questions will not be answered until next year and beyond. Profitability in its core UK retail market is not in doubt and capacity increases next year worth 40% will be a positive. M&S seems to be working. Key questions for next year and beyond are whether the shift to online continues as vaccines are rolled out, and can it really justify these enormous multiples based on the promise of future profits from its international deals for much longer?

Markets are looking ahead to a big slate of economic events and data today:

ECB: The European Central Bank is likely to announce fresh stimulus by way of expanding its Pandemic Emergency Purchase Programme (PEPP) by an additional €500bn and extend it beyond the current Jun 2021 cut-off to the end of next year. This is not likely to produce much volatility in EUR crosses as there was a strong pre-commitment at the October meeting to taking additional easing measures in December. As we said at the time, it’s all but a down deal now that France and Germany have locked down and the economy is heading for another recession. Last time Christine Lagarde said staff were working on recalibrating all instruments, which means even interest rates could be cut further in addition to expanding QE envelopes, however any tweak to rates looks unlikely at this stage.
Recent survey data has been soft and hard data for November when it comes is not going to be pretty. Q4 is shaping up badly, though Lagarde and co may now be willing to jump the shark on vaccines and prep for a rosier 2021 – which would suggest no dovish surprise from the ECB. Inflation remains very weak and has been stable at –0.3% since September.

The stronger euro exchange is another headache for the ECB – traders will be closely watching for any jawboning by Lagarde around the recent euro strength. We should also look for extension of TLTROs and upping the tiering facility to help banks. Lagarde will look to show that the ECB will stay super-loose for as long as necessary but will lean hard on the fiscal side too and not want to do too much. Moreover, the advent of vaccines will keep the ECB from over-doing it now. As ever, the announcement is at 12:45 GMT and presser follows at 13:30.

US CPI and weekly unemployment claims: After a tame reading for October, core and headline CPI are seen ticking up marginally to 0.1% over last month and +1.1% year-on-year for the headline number and +1.8% for the core reading. US inflation expectations have hit 18-month highs, but it’s not thought that we will see a material imprint on last month’s figures – expectations seem to be more about the coming Great Monetary Inflation caused by central bank printing and pro-cyclical fiscal stimulus in 2021 as vaccines allow the economy to bounce back. Nevertheless, the latest PMI surveys for November showed the quickest rise in selling prices yet recorded, with the rate of inflation hitting a record high in the service sector and a 25-month high in manufacturing. Inflation may be coming, but probably not until the pandemic is over.


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