Post date: 19/04/2021 12:13

The somewhat puzzling retreat in US bond yields last week, together with very strong economic data, buoyed risk assets in general, including equities, commodities and credit. The dollar did not fare well, unsurprisingly, and fell against every other G10 currency and major emerging market currency. Strength in oil and copper prices is proving particularly supportive of Latin American currencies and the ruble, which managed to shrug off the announcement of a new battery of US sanctions against Russia. The euro will be the main focus for the week ahead. The ECB meets on Thursday. No changes in policy are expected, and the focus will be once again on communication, particularly regarding the PEPP sovereign bond purchase programme. April´s flash PMI surveys of business activity will then be released on Friday. This will be the first serious test of the euro´s fledging rally, as these are the most critical leading indicators of economic activity in the Eurozone.


Monthly GDP data out of the UK was consistent with expectations for a contraction in the first quarter, though the details were slightly better than feared. Markets looked through the badly lagging data, and sterling traded in line with the euro, rising modestly against the US dollar on the back of lower US yields. This week, the labour market should not move markets as it does not reflect the reopening of the UK economy. More important will be the PMIs of business activity on Friday and inflation data on Wednesday. The former in particular should show a healthy rebound, reflecting the April reopening measures.


The recent pullback in yields will provide a welcome breather to the ECB as it tries to keep financial conditions at a very accommodative level. Consequently, we do not expect much to change in ECB communications at the Thursday meeting, where we expect Lagarde to sound noncommittal about further expansions of the PEPP sovereign debt purchasing facility. The PMI indices Friday are setting up to be the event of the week. Most strategists expect a retreat after last month´s surprising strength, but it is possible businesses are already looking to the progressive lift up of the lockdowns and we could see an upside surprise, which would provide fuel for the recent euro rebound.


The slate of impressive economic data out of the US failed to have the expected impact on US yields, which actually pulled back, leaving the ten-year Treasury paying just 1.6%. There were positive surprises across the board, including inflation, jobless claims, housing starts and a huge jump in retail sales, the latter yet another sign of roaring demand. The dollar sold-off on the wake of increasing risk appetite worldwide and lower yields. We expect this week´s mostly second tier data to further confirm the strength of the US recovery. US yields will be a wildcard, although we expect continued strength in data to fuel another increase their towards the top of the recent range.