The wrestling match between rising bond yields and stock markets remained centre stage this week as investors seemed divided about whether the rise in longer-term bond yields was due to a welcomed upswing in growth expectations or a worrisome increase in future inflationary pressures.
President Joe Biden’s signature $1.9 trillion Covid-19 relief bill passed the Senate 50-49 on Saturday following a more than 25-hour marathon of amendment votes completed after Democrats settled an intra-party dispute over unemployment aid. The American Rescue Plan Act now heads back to the House for expected approval in the coming days with Democrats aiming to have it signed into law next week. Critics of the bill continued to point to the danger of reigniting inflation by overheating the U.S. economy. As a result, markets are keeping a close eye on rising bond yields and increases in commodity prices.
At the same time, the market was left disappointed, after Fed Chair, Jerome Powell did not outline any new initiatives to keep U.S. rates low during a Wall Street Journal webinar on Thursday. He offered no new commitments to continued asset purchases or other actions, but restated the Fed’s willingness to see inflation rise above 2%.
U.S. manufacturing expanded in February at the fastest pace in three years and material costs accelerated the most since 2008 as supply shortages challenge the industry. The ISM manufacturing activity index rose to a level of 60.80, compared with a reading of 58.70 in the prior month.
On the COVID-19 vaccine front, Americans received some further good news this week as the country began distributing the Johnson & Johnson single-dose vaccine, which regulators had approved over the previous weekend. The White House also announced on Tuesday that Merck will help make Johnson & Johnson’s single-shot vaccine, a rare collaboration between rivals.
China’s government set a conservative economic growth target of above 6% for 2021 and will narrow its budget deficit to 3.2% of GDP, signalling more restrained monetary and fiscal policies compared to other major nations still pumping in stimulus to support growth. China's economy continues to edge towards world dominance. Its share of global GDP in 2020 was 14.5%, up from 9.2% in 2010.
In Europe, the EU announced that it will take legal action against the UK government for breaching the Brexit deal rules on Northern Ireland, after Britain unilaterally extended grace periods for border checks on food imports to Northern Ireland.
Angela Merkel bowed to public pressure to lay out plans to re-open Germany’s economy. A number of sectors (hairdressers, book stores, flower shops, gardening centres) opened up for business this week. Further easing will follow every two weeks. However, the closure of hotels, restaurants and other retail outlets was extended to March 28.
Former French President Nicolas Sarkozy was found guilty of corruption by a court in Paris, becoming the country’s second head of state in the modern era to be convicted of a crime after leaving office.
In the UK, this week’s budget to Parliament pledged GBP 65 billion of additional fiscal spending and temporary tax breaks for business investment. However, most individuals will have to pay more tax over time, and corporate taxes will rise to 25% in 2023 from the current 19% rate.
Brent crude jumped +7.94% to nearly $70 a barrel this week, after OPEC and its allies said on Thursday that it will be keeping oil production largely steady, even after brent crude prices have already staged a remarkable recovery this year.
Global equity markets posted mixed returns this week. In the U.S., the Dow Jones Industrial Average (+1.82%) and S&P 500 (+0.81%) were stronger, whilst the Nasdaq (-2.06%) lost some ground. European markets including the FTSE 100 Index (+2.27%) and Euro Stoxx 50 (+0.91%) were stronger against weaker performances from Japan’s Nikkei 225 (-0.35%) and China’s Shanghai Composite Index (-0.20%).
Market Moves of the Week
It was a relatively quieter week on the South African front. Manufacturing PMI recorded a rise to 53.00 in February, compared to a reading of 50.90 in the prior month. At the same time, new vehicle sales recorded a drop of 13.3% on a YoY basis in February.
The JSE All Share Index ended the week up +3.23%, with all three of the major sectors leading the market higher. The resource (+4.95%) and financial (+4.59%) sectors were relatively stronger, compared to the industrial sector (+1.71%). By Friday close, the rand was trading at R15.37 to the U.S. Dollar, weakening against all of the major developed currencies this week.
Chart of the Week
Fed Chairman Jerome Powell has emphasised the Fed’s willingness to let inflation overshoot to facilitate a return to “full employment”. While this implies loose monetary conditions going forward, he has been less vocal on the topic than the European Central Bank. Several members of the ECB’s Governing Council have expressed worries about rising real yields and a readiness to add even more stimulus if needed. As a result, bond yields between the U.S. and Eurozone have started to diverge again, putting upward pressure on the U.S. dollar. Source: The Daily Sketch, written by Jeroen Blokland.