The reflation trade that dominated early 2021 in the bond market has taken a breather, leaving investors bracing for a set of key data in the coming week that has the potential to reaffirm expectations that pressures on the prices will intensify as the economy rebounds.
All eyes will be on Tuesday’s release of the US Consumer Price Index for March, which is expected to post a significant jump. The figure will likely be skewed by the huge drop in figures from the previous year when the pandemic broke out. But traders may be reluctant to reject an acceleration – as they did to some extent with Friday stronger than expected.producer price data – if there is a growing sense that this marks the start of a trend.
The statistics come at a crucial time for bond bears betting on reflation. Market measures of inflation expectations, fueled by the Federal Reserve’s ultra-low policy and massive fiscal stimulus, have stagnated near multi-year highs and have yet to be consistently backed up by real data. The same goes for the yield curve gauges, which have retreated from recent peaks. It’s not just bond positions at stake: Without data tracking, bets on Fed tightening as early as the end of 2022 could fade, which could undermine demand for the surprisingly resilient dollar.
“We don’t have a strong reflation-trade momentum right now because people are waiting for more data,” said Daniel Tenengauzer, head of market strategy at Bank of New York Mellon Corp. “As the data comes in we are likely to see reflation trade play stronger again” around the middle of the year.
Tenengauzer says every inflation reading counts from that point on because “plus inflation stays at 2.5%,” an annual CPI reading last seen before the pandemic set in. , “The more you are underwater from holding fixed income securities.
Ten-year Treasuries yields rose on Friday, while finishing below the day’s high, after the PPI report showed a 4.2% increase from March 2020. Although that is from relative at a time when the pandemic caused price pressures to collapse, it was the biggest annual gain since 2011. The benchmark yield has fallen since approaching 1.8% last month, the highest since January 2020.
There are strong arguments onboth sides of the inflation debate as the market moves from a phase where it was driven by growing expectations of price pressures to a phase where investors seek a backup of the data. It is also believed that expectations of growth, not inflation, could end up dominating the T-bill discourse later this year, thanks to a hike.real returns.
Fed Chairman Jerome Powell, who mustwill appear on “60 minutes” Sunday and also speak Wednesday, said allthe pick-up in inflation is likely to be temporary. Hoisington Investment Management Co., meanwhile, said in its latest quarterly report that inflation fears are a “psychosis” that will subside.
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But that doesn’t mean that a rise in the consumer price index won’t scare bond investors, at least briefly. The March figure is expected to show a year-over-year increase of 2.5%, which would be the highest since January 2020 and above every point on the yield curve. It is a development that can also harmstocks.
“The market is already pricing a reflation theme since the second half of 2020, but solid and realized impressions would almost add fuel to the fire,” said Shahid Ladha, Group of 10 head of Americas interest rate strategy at BNP Paribas. HER.
That, in turn, would put upside risk for yields on interim maturities due to the possibility that the Fed would have to tighten sooner than expected, he said.
Investors are also charge with the combined absorption of $ 120 billion in coupon auctions next week, including 30-year debt, as they reflect on the issue of inflation. While expectations for a high CPI reading may be a concern, last month showed that there is sufficient demand for Treasuries, which should help “grease future bond auctions” , Tenengauzer said.
What to watch
- Economic calendar:
- April 12: monthly budget statement
- April 13: NFIB small business optimism; IPC; average earnings
- April 14: MBA mortgage applications; import / export price; Fed beige book
- April 15: jobless claims; retail sales; Empire manufacturing; The Philadelphia Fed’s Business Outlook; industrial production; Consumer comfort Langer; business inventories; NAHB Housing Index; ICT flow
- April 16: Building permit; starts; University of Michigan sentiment
- Fed Calendar:
- April 12: Eric Rosengren of the Boston Fed
- April 13: Patrick Harker of the Philadelphia Fed; Mary Daly of the San Francisco Fed; Thomas Barkin of the Richmond Fed; Raphael Bostic of the Atlanta Fed, Loretta Mester and Rosengren of the Cleveland Fed at an event on racism and the economy
- April 14: Robert Kaplan of the Dallas Fed; Powell addresses the Washington Economic Club; Beige book; John Williams of the New York Fed; Vice-President Richard Clarida discusses the new political framework; Bostic
- April 15: Bostic; Daly; New York Fed Executive Vice President Lorie Logan; Clarida; Mester
- April 16: Kaplan in two appearances
- Auction calendar:
- April 12: invoices for 13, 26 weeks; Grades 3, 10 years
- April 13: 30-year bonds
- April 15: invoices of 4 to 8 weeks
– With the help of Elizabeth Stanton
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