Good Morning, Inflation fears
Volatility returned last week as the markets started to take seriously the chances of a sharper recovery than many investors had been anticipating. As could be expected, US Bonds sold off, reflecting investors’ fears of inflation and the subsequent need for higher interest rates. Other asset classes, such as equities, became less attractive with increasing interest rates, forcing a reassessment of risk. Last week’s turning point was when the yield on 10-year bonds became higher than the yield on the S&P stock index and, in doing so, brought the risks of overly inflated stock markets into focus. As the stock markets react negatively, the dollar benefits from its perceived safe-haven status, and beta currencies such as the pound and Swedish krona suffer. However, it must be noted that the pound performed better than most of the G10 currencies and even touched the giddy heights of $1.4250 at one point.
After the passing of President Biden’s $1.9tln relief package late on Friday night, we are expecting more volatility in the currency markets as the inflationary impact of such a mammoth stimulus to the economy is calculated. This week several Federal Reserve officials are talking, including Fed Chairman Jerome Powell on Thursday, and we will be watching to see if they look to calm the markets. There is also a raft of data out in the US, including the monthly Non-Farm payroll report on Friday, for investors to digest. Closer to home, there is also plenty to look forward to from the UK, if that’s the right phrase to use when Chancellor Rishi Sunak presents his first Budget on Wednesday afternoon.
The pound had a volatile week against the dollar, with a larger than normal trading range of nearly three cents over the period and has opened just under $1.4000 this morning, as stock markets remain nervous. Sterling looks set to continue to benefit from the UK’s impressive vaccine rollout and the newfound optimism over the economy’s prospects. Against the euro, the pound has held onto a lot of its recent gains, opening at €1.1570, showing the markets faith in Boris Johnson’s roadmap to a full reopening of the economy by Mid-Summer’s Day on the 21st June. The final figures for Markit’s Manufacturing Purchasing Managers Indexes (PMI) are released this week, but Chancellor Sunak’s budget, on Thursday, will be the dominant event. During his speech, we will learn whether the government plan to extend the furlough scheme for a further few months and, as importantly, how he intends to get on top of the pandemic induced debt burden.
The European Central Bank has taken a different attitude to the US regarding the selloff in bonds and has hinted strongly at further intervention and flexibility to calm the markets. It has been using its Pandemic Emergency Purchasing Programme (PEPP) to intervene and make for orderly markets by buying large amounts of assets, roughly €17bn per week. They are likely to announce an increase in this number today, and unless it’s a sizeable amount, the negative sentiment will increase and damage the single currency. The euro is also not helped by the ongoing debates over reopening that are taking place between the leaders and the increasing tensions between them. This week’s data will give us some signs of how the EU’s economy is faring. The Eurozone Consumer Price Index is released tomorrow, and Retail Sales and Unemployment data are released on Thursday. The ECB has plenty of opportunities to present their views, starting when President Christine Lagarde and Luis De Guindos from the ECB speak this afternoon. On Wednesday, Isabel Schnabel and Fabio Panetta are also slated to speak.
The passing of the $1.9trln stimulus bill late on Friday looks set to lead to further volatile trading sessions this week, as investors weigh the impact of such a large amount of cash coming into the economy will have on inflation. These fears are likely to translate into further sales of the US bond market as yields rise and a consequential appreciation of the dollar, causing sterling to come under pressure. Several officials from the Federal Reserve will have the opportunity to air their views when they speak in the week ahead. Most important of all, Chairman Jerome Powell is speaking on Thursday. So far, he has not signalled any intention of standing in the way of higher yields, and investors will be watching to see if he modifies his attitude. The markets will also get to know how the real world is coping with the release of various employment data sets, including the critical Non-Farm payroll number on Friday. It is worth noting that traders may be circumspect of this data as it is likely to be distorted by the recent weather in the Southern States and the partial reopening of California. As elsewhere in the world, we will also be watching PMI data when it is released on Monday and Wednesday and Factory Orders on Thursday.
What could have been a month which saw the breaking of a 5 year-long trend of krona weakness in February suddenly saw all gains made in the past 3 weeks evaporate in less than 12 hours. This happened as the fear of higher US interest rates affected all beta-currencies. The krona finished the month weaker than it started against the euro and is now trading at levels last seen in June 2020 against Pound Sterling. The longer-term picture for the Swedish krona has not changed, and it remains the currency most analysts expect will gain the most in 2021. Whether speculation about higher interest rates continues to impact its current favourability is something we will closely monitor. This week kicks off with the Swedbank PMI Manufacturing Survey, and the Budget Balance is released on Friday. The Stockholm region and the regions north of it have their mid-term elections this week.
The Norwegian krone followed its big brother on the last two trading days, and it too finished the month weaker than it started despite going from strength-to-strength throughout February. Monday starts with the DNB PMI Manufacturing Survey, which is the only important data this week. As with all currencies, any further speculation about higher interest rates will be of utmost importance.
Have a great week.