Bassanese Bites: Bond watch – March 08 2021
Global equities managed to end last week in positive territory, despite a further lift in bond yields. Although markets were initially disappointed that Fed chair Powell did not promise to do more to stem the rise in yields, investors finally concluded after the solid US payrolls report that good news was good news after all.
Indeed, as I suggested last week, US payrolls surprised on the upside on Friday, with a 379k gain in jobs (market +200k) and drop in the unemployment rate from 6.3% to 6.2%. The U.S. Senate also passed Biden’s $US1.9 trillion stimulus bill on Saturday, and it should pass the House on Tuesday. Of interest is whether nervous equity investors view this as good news also, or bad news to the extent it helps push up bond yields.
Adding to the nervousness, OPEC agreed not to increase production last week, which saw oil prices push higher. For what it’s worth, however, last week’s Beige Book report on the U.S. economy only hinted at modest inflationary pressure. While input costs for many businesses had increased (such as fuel, steel and lumber), and some had found success in passing this through to consumer prices, “many others were unable to raise prices”.
As seen in the chart below, so far at least the pull back in equity prices has been fairly modest despite the almost parabolic move higher in bond yields in recent weeks. Also notable is the apparent bottoming in the US dollar, which could reflect a safe haven element and/or the growing attractiveness of U.S. bonds and strongly performing economy. Despite all the inflation talk, moreover, gold still has few friends.