The buy-everything animal spirits refused to be caged any longer overnight as financial markets returned the inflation genie to its bottle.
Technology was back, the S&P 500 and Dow Jones closed at record highs, US yields held steady, Bitcoin rose, and the US Dollar fell, with markets partying like it was 2020.
Yesterday, the European Central Bank remained unchanged and signalled it would accelerate the pace of QE buying to cap yields. “The Euro gained a pass mark, it seemed, because the ECB did not increase the size of the QE programme; instead, they chose to front-load it,” commented Jeffrey Halley, senior market analyst at OANDA, this morning.
US Initial jobless claims fell to 712,000, its lowest since November, allowing another reason for the bulls to escape from their pens. The US 30-year bond auction also passed without incident.
“Although the bid-to-cover ratio wasn’t spectacular, like the 10-year the day before, most of the issue went to direct buyers, not primary dealers, indicating an underlying broader demand. That was the last potential barrier for the week for simmering global recovery demand,” Halley said.
Another tailwind came from the White House, where President Biden signed the stimulus into law with cheques heading out the door almost immediately. President Biden stated that all adult Americans would have access to a Covid-19 vaccine by May, well ahead of the previous schedule.
“All in all, there were few reasons to be anything other than business as usual into the end of the week. The fall in the US Dollar overnight will be welcomed by Asian countries, who had an uncomfortable week watching it strengthen in their dirty peg world,” he continued.
With regular service resumed, Halley wonders whether traders can expect markets globally to end the week on a positive note.
“So, have we reached “peak inflation sentiment?” Probably not. The Biden stimulus will be positive for American and global markets in the short-term. Still, its effects, and those of the general recovery, will start to accelerate in the March data everywhere,” he explained.
“The inflation we will see is recovery inflation, not stagnation inflation. With the Federal Reserve comfortable with a steeper yield curve, more adjustment to a higher cost of capital is still required. The inflation genie may have been put back into its bottle for the weekend, but someone is sure to pick it up and uncork it again soon,” Halley continued.
UK GDP this morning
The UK GDP data this morning will be given a lot of attention. Economists are predicting -4.9 per cent growth for January, on a monthly basis, which would be a sharp fall from the 1.2 per cent seen in December.
“We know the British economy took a hit in January because the services PMI reading slumped to 39.5, an eight month low, also, the retail sales reading fell off a cliff as the level was -8.2 per cent, a nine month low,” commented David Madden, market analyst at CMC Markets UK, this morning.
In the final quarter of 2020, the UK economy grew by 1%, ahead of the 0.5 per cent consensus estimate.
At the same time, the UK’s services, industrial output, manufacturing output, construction output and trade balance will be published, economists are predicting -5.4 per cent, -0.6 per cent, -0.8 per cent, -1 per cent and -£12.5bn, respectively.