Daily Market Pulse

Inflation beyond mere base effects

6 minute read


The movement in the market yesterday can simply be described as rising yields, falling stocks as the dollar continues to find solid demand. The Benchmark 10-year Treasuries rose by 8bps yesterday, nearing 1.5% once more, while the S&P 500 dropped 1.31%. As a result, the U.S. dollar rose 0.18% against a broad basket of major currencies on Wednesday. The latest ISM services price index published yesterday pointed to inflation beyond mere base effects, which triggered the rise in yields. Today, market players will keep an eye on Federal Reserve Chairman Jerome Powell, who is set to speak at a public event. Elsewhere, the U.S. jobless claims data is set to show a further 750k people filing for unemployment last week. Any number out of the market’s expectations should influence the greenback.


The Euro slid 0.21% against the greenback on Wednesday after PMI data confirmed that virus restrictions are still holding back services, overwhelming the solid upturn in manufacturing, but the numbers were better than expected. Furthermore, the fact that Europe is still lagging in the great vaccination race, puts additional pressure on the EUR. At the same time, Covid-19 new cases are creeping higher in Italy and France, signaling that restrictions will be extended into Q2. Today, the European Central Bank will release its Economic Bulletin, which contains the statistical data that policymakers evaluate when setting interest rates.


The British Pound continued to show resilience against the U.S. dollar. Yesterday, the GBP closed 0.04% up after Chancellor Rishi Sunak unveiled the UK Government’s spending plan for 2021. As widely expected, the chancellor’s Budget focused on giving financial support to those affected by the pandemic. Still, it is worthwhile noting, corporation tax on company profits will rise from 19% to 25% in April 2023. On the economic front, the PMI report showed that U.K. service sector activity was relatively stable in February and so it appears that the third national lockdown has seen limited spillovers to parts of the economy beyond the scope of government-mandated closures. Looking ahead, no material data will be published today, so market participants will pay attention to Fed Chair Powell’s speech at a public event later today, where he is expected to make some remarks about U.S. economic outlook and bond markets.


The Japanese yen remains weak as the USD/JPY pair extended gains (+0.3%) and touched the highest level since July 2020. The JPY’s drop was on the back of higher U.S. yields yesterday, which crept up to 1.486% as hopes that vaccine distribution and more government stimulus will drive the U.S. economy into a solid recovery. The JPY and U.S. bonds are negatively correlated to each other, which means when yields go up, the JPY goes down. Looking ahead, all eyes will be on U.S. Fed Chairman Jerome Powell, who is set to speak later today. Market players will pay attention to his remarks for signs the central bank is poised to concede the risk of a rapid rise in interest rates.


The Loonie did not manage to extend further gains over the U.S. dollar on Wednesday. Nonetheless, having only slid 0.16%, the Loonie held on to most of this week's gains as oil prices rose and domestic data showed the value of building permits climbing to a record high in January. According to Statistics, the value of Canadian building permits rose by 8.2% to a record level of $7.8 billion in January from December, the residential sector saw higher intentions for both the single-family and multi-family components, while the industrial and commercial components led the growth in the non-residential sector. Elsewhere, oil prices are moving higher ahead of a crucial OPEC+ meeting later today, with energy traders eagerly waiting for a global supply decision amid the recent oil price rebound.  


The Mexican peso printed substantial losses against the U.S. dollar on Wednesday, inching 1.69% down and leading losses across LatAm currencies. The political scenario weighed on the MXN as the Mexican Senate also approved the controversial legislation that will give priority in electricity dispatch to the state power utility, giving it an edge over private players. Against this backdrop, the Mexican government triggered fresh tensions with private power producers, such as the Spanish Iberdrola. Concerns over the rapid spread of the virus in the country, coupled with the Covid-19 vaccination at a slow pace, are still hurting the Mexican assets.


The Chinese yuan was steady (+0.04%) against the U.S. dollar, even though a rise in U.S. yield was seen on Wednesday. Higher U.S. yields narrow the spread between the U.S. and Chinese bonds, making Chinese bonds less attractive. It is expected that volatility in the domestic currency market will continue to stay low ahead of the annual parliament tomorrow as Chinese financial markets are usually stable during key economic and political events. Meanwhile, market players also expect the meeting to set the tone for policy direction this year, hence the tone for the CNY.


The Brazilian real breathed a little on Wednesday after four trading sessions of heavy losses against the greenback. The BRL edged up 1% as the House Speaker, Arthur Lira (PP-AL), ruled out the possibility of putting the emergency payments program “Bolsa Família” out of the spending ceiling. On the economic front, the PMI survey showed the Brazilian service sector endured another setback in February. With the Covid-19 pandemic discouraging bookings for a second straight month, business activity continued to contract. Some optimism notes here, real GDP in Brazil rose 3.2% quarter-on-quarter in Q4, above the consensus, 2.8%, but slower than the 7.7% increase in Q3. This means that Brazil had a decent end to 2020, but a pause in the recovery looms.


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