Yesterday, the bond market stole the market’s attention and economic data was put aside. The 10-year bond yields rose by more than 10bps, moving up to the 1.5% mark. It is worthwhile noting that the 10-year note is now higher than that of the S&P dividend index, which means that investors can find a decent real return when investing in U.S. bonds. As a result, S&P 500 ended yesterday 2.4% lower, its second-worst day of the year, while the tech-heavy Nasdaq tumbled by more than 3%. Though forgotten, official data reported initial claims for state unemployment benefits totaled a seasonally adjusted 730,000 for the week ending Feb.20, compared to 841,000 in the prior week, signaling that job cuts are starting to ebb as Covid-19 infections decline and vaccinations accelerate.
The one G10 pairs that somehow bucked the stronger dollar trend yesterday was the Euro. The single-currency managed to close 0.08% up, outperforming the major currencies. That resistance could have come from the economic front, after the European Commission Economic Confidence Index in the Eurozone rose to 93.4 in February, from 91.5 in January, above the consensus, 92.1. Industrial Sentiment report also showed that selling price expectations in manufacturing rose further in February, consistent with anecdotal evidence of mounting supply-side pressures and higher commodities prices driving up goods inflation.
The Pound lost more than 0.8% against the greenback while British shares were down again on Thursday amid a dollar demand spike. Benchmark U.S. 10-year yields, which have doubled since November, jumped above 1.5% level yesterday. That surge led investors to sell almost everything, including the Pound. Apart from yields, issues over Brexit still simmer, although analysts maintain they won't hurt the pound in the short to medium-term. Elsewhere, progress in beating the Covid-19 pandemic has slowed since mid-February. The number of cases slowed to 15.7% on February 25, from the 25% average rate seen between mid-January and mid-February. The pace of vaccine rollout has slowed as well. In the seven days to February 24, 2.3M people received the first dose, down from the 3.0M rate seen in the first two weeks of this month.
The safe-haven yen’s decline came even as Asian stocks followed their U.S. counterparts down as the spike in yields fanned inflation worries. The Japanese yen weakened 0.27% against the U.S dollar, which was relatively less impacted among the G10 peers. The Tokyo inflation, surprisingly, provided some support for the JPY. The Tokyo CPI fell just 0.3% year-over-year in February, with deflation moderating from a downwardly 0.5% drop in January. Today, market players will continue to monitor the U.S. yields and the potential reactions from the Japanese policymakers.
Although oil prices settled 0.5% higher, the CAD retreated from a three-year high as U.S. bond yields jumped significantly. The rise in oil prices was not enough to support the CAD on Thursday, with investors closely watching the U.S. yields moves, which pressured global equity and FX markets. On the economic front, Statistics Canada said that Canadian payroll employment rose by 44,200 in December after decreasing by 64,500 in November, The publication had a muted impact on the CAD. For today, the industrial producer prices index is expected to bring some clue of how the manufacturing sector performed at the beginning of this year.
Despite a solid current account balance data released yesterday, which confirmed that Mexico's external accounts remain solid, the Mexican Peso inched down 2.36% on Thursday. Official data reported that the country recorded an unadjusted surplus of USD17.4B, well above the USD3.2B surplus in Q4 2019. Yesterday, the main catalyst for the MXN’s depreciation was a surge in the U.S bond yields, which prompted investors to sell-off their position in risky assets and switch to U.S. bonds. On the domestic front, external financial fragility and risks should persist, due mainly to the government’s approach to foreign investment. Prolonged policy uncertainty could take a toll on Mexican investment and weigh on the MXN.
The one currency, outside of G10 pairs, that somewhat resisted the stronger dollar trend was the Chinese yuan. The CNY was able to keep firm and show some gains (+0.02%) on Thursday amid a dollar spike. Investors will eagerly expect the PMIs report, which will be published tomorrow. Although outside of trading hours, the data will provide fundamentals for the next week.
Brazilian Real plummeted (-2.53%) to a near four-month low on Thursday as a rise in the U.S. Treasury bond yields and inflation expectations hit riskier assets across the emerging markets. Also putting additional pressure on the BRL, the Wholesale Inflation Index released yesterday by the Fundação Getulio Vargas, which measures and tracks the changes in the price of goods in the stages before the retail level, increased by 2.53% in February. Among the reasons responsible for the increase is the subgroup of fuels for consumption, which changed from 5.08% to 12.68% in the period. With the result, the rate accumulates an increase of 5.17% in the year and 28.94% in 12 months. Looking ahead, higher U.S. yields, along with expectations of higher inflation in Brazil, are providing enough fundamentals for Brazil’s Central Bank to assess a rise in the benchmark interest rate “Selic” in the upcoming policy meeting.