Are investors becoming a bit worried that the rise in US yields is going so fast it might hurt the recovery?

Markets

Most aspects of the reflation trade on Friday continued according to the established script. The three major US equity indices (Dow +0.19%, S&P +0.55% and Nasdaq + 1.03%) all closed at all-time highs. This was also the case for the German Dax. US payrolls disappointed. Net employment in the US in December declined 140 000 as a decline in the likes of leisure and hospitality more than counterbalanced ongoing positive job growth in the goods-producing sector. Markets initially showed some hesitation after the release but in the end the trends of higher US yields and equities simply continued. Later, the Biden administration flagged that it will announce plans for trillions of USD of additional pandemic relief stimulus on Thursday. US LT yields extended their gradual uptrend with the 10-y and 30-y respectively rising 3.6 bps and 3.1 bps. The rise this time was due to higher real yields rather than inflation expectations (US 10-y real yield up 6 bp). Change in German yields were still limited with yields rising less than 0.5 bp across the curve. The rise in US real yields caused the dollar to further decouple from the reflation trade. The US currency extended the (corrective) rebound that started on Thursday. The Trade-weighted dollar index returned north of 90. EUR/USD closed at 1.2218 (from 1.2272 on Thursday). USD/JPY tried to regain the 104 mark, but still closed slightly below this reference. Sterling resisted the dollar rebound rather well, with cable closing little changed at 1.3568. EUR/GBP drifted back to the 0.90 handle (close 0.9010).

Asian equity markets initially joined the positive WS momentum on Friday, but opening gains reversed as the session proceeded and some indices even slipped into negative territory. US equity futures also suggest that some pause on recent rally might be in store. Cyclical commodities including copper and oil but also gold are falling prey to profit taking. Are investors becoming a bit worried that the rise in (US) yields is going so fast it might hurt the recovery? Treasury futures show no clear trade, but trading is limited as Japanese markets are closed. The dollar extends its rebound globally (DXY 90.34), but the decline of the yuan remains very limited (USD/CNY 6.48 area).

Today's eco calendar is rather thin. Later this week, plenty of Fed governors will speak. We look out whether they join recent comments that (gradually) higher yields due to higher inflation expectations isn't that worrying. In the same context, we also keep a close eye at the monthly US 3-10-30 Treasury auctions starting today. Later this week, markets will also look forward to the start of the earnings season (big banks on Friday). A more cautious risk sentiment and ongoing high US yields might also support the recent corrective rebound of the dollar. The 1.2059/1.2011 (Dec 09 correction low/previous top) comes in as first reference for this correction.

News Headlines

December Chinese producers' prices declined at their slowest level since February (-0.4% Y/Y vs -0.7% Y/Y expected). Higher raw material prices and the rebound in the manufacturing sector contributed to move. PPI rose by 1.1% on a monthly basis, the fastest since end 2016. December CPI returned to positive levels (0.2% Y/Y vs flat expected) after turning negative for the first time in over a decade last month. Food prices contributed to the higher consumer prices.

Fed vice-chair Clarida said last Friday that the US economy was headed for an impressive 2021, profiting from the potential of both the vaccination process and larger government spending under the Biden administration. Amid this positive economic outlook, he currently proposes to keep the pace of bond purchases ($120bn/month) unchanged throughout the rest of the year. Any change is "well down the road". Pinpointing when the Fed will start reducing monthly purchases will become a topic of debate this year. Atlanta Fed Bostic was the first governor to give the prospect of already doing so in H2 2021.

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