Swissquote: Rising inflation expectations, treasury yields worry

February 19, 2021

By Ipek Ozkardeskaya, Senior Analyst at Swissquote

It’s great news that NASA’s Perseverance landed on Mars, after the Chinese and United Arab Emirates spacecraft entered the Martian orbit, lately. We are ready to colonize the red planet, and it’s about time as the world is going completely crazy nowadays with the pandemic, the climate change and collapsing economies. But it’s a bit early to uncork the champagne, as most of us will still remain stuck on our blue planet, and will need to find ways to get things better.

It’s crazy, how the mankind successfully manages to land on a distant planet, but we are still unable to find a workable solution to fight the Covid-led economic crisis, direct the huge amount of cash to those in need, and sophisticate our broadly unsophisticated global monetary and fiscal systems. 

In this respect, yesterday’s data showed that unemployment claims in the US remained above 800’000 last week. The surprising improvement in the latest PMI figures – which point at a faster recovery in economic activity and 5.3% jump in retail sales last month as a result of $600 distributed to households didn’t fully reach the final destination. But hope is everything. Today, PMI figures across Europe an US will give us an update on how things go despite the new lockdown measures in February and our endless fight against the coronavirus.  

Could good PMI figures improve the gloomy market mood? 

Even though investors perceive good economic news as bad for stock prices, that has to change very soon, as the mounting inflation expectations, rising treasury yields and soaring commodity prices could announce the end of the ultra-lose monetary policies, even if the underlying economy didn’t fully benefit from the wellness of cheap cash. 

In this respect, strong PMI figures may not lead to higher stock prices before the weekly closing bell, because the surge in commodity prices have already started showing dangerously in producer prices. Released earlier this week, the US core CPI hit 2% in January, almost doubled from a month earlier, and the firm positive trend in oil and commodity prices won’t soften the price inflation outlook, both from consumer and producer point of view. 

Copper prices surged to the highest levels before the pandemic, and even before the US-China trade war. And we can now see the US 10-year treasury yield following a similar pattern to the upside. What’s the link between the two? Inflation expectations. And that’s exactly why the US indices feel the pinch of the latest data, the mix of good and bad data is felt like cold chills amid warnings that the stock prices may have gotten ahead of themselves, some 10-15% above where they should be, and the fear of a bursting market bubble is everywhere. Even the most bullish of the bulls are prepared for at least some downside correction.  

Anyway, happily, all this economic case-tête didn’t prevent Bitcoin from advancing past $52’500 per coin, but Tesla extended losses below $800 per share. Its Bitcoin holdings didn’t save the company this time. The fall in Tesla was mostly due to the latest report from Consumer Reports’, where Tesla’s ranking fell big for being less reliable than its peers. Ouch. Only the Model 3 made it to the Top 10.  

And unfortunately for those who hedge their risk holdings with gold, the yellow metal is set for its worst week since November. The rising inflation worries didn’t save gold this week, as the soaring treasury yields won over, and pushed the yellow metal to the lowest levels since July last year. But there should be some dip-buying in gold as we approach the oversold market conditions, despite the rising opportunity cost of holding the non-interest-bearing yellow metal.   

In the FX, the US dollar recovery remained short-lived, and Cable bulls are back on track towards the 1.40 target. The pound continues its journey higher with firm steps, but the combination of softer oil and firmer pound could weigh on the FTSE stocks before the weekly closing bell. 

US crude slipped below the $60 per barrel, despite a sizeable 7.3-million-barrel drop in US inventories last week. The end of the Texas energy tragedy will likely call for a deeper downside correction in oil prices. There is potential for at least a $3-4 pb fall in actual prices, as a retreat to $56 per barrel wouldn’t even damage the short-term positive trend.