The weekend was a quiet one on the news front, and that has set Asia up for a mixed start to the week. China held its 1 and 5-year Loan Prime Rates steady this morning as expected. However, it continued gently withdrawing liquidity via the repo market, ensuring that the yuan will remain firm as the week commences.
Some divergences are evident today, notably in currency markets where the US yield curve’s steepening on Friday could not support the US dollar. It fell on Friday and starts the week on the back foot, with global recovery plays, notably in base metals, seemingly driving sentiment out of defensive US dollar positioning. The rise in US yields was most notable in the 30-year tenor which climbed to 2.1357%, while the 10-year rose more modestly to near 1.34%.
For all the handwringing and noise about the rise in US yields, they remain well below pre-Covid levels, especially the 10-year which sat close to 1.90% pre-virus arrival. A steepening yield curve is no bad thing, and in economic-speak, is typically suggestive of an expanding or recovering economy. It will be good news for savers, one of the worst victims of quantitative easing that went on far too long in the 2000-and-teens.
It will be positive for the banking sector as well. Banks are more profitable when yield curves are positive and steep, and theoretically it should encourage them to lend. Far more so than in a European-esque negative rate zombie environment. Love them or hate them, banks are still relevant, and we still need them.
The steepening in the US yield curve will make Federal Reserve Chairman Jerome Powell’s two-day congressional testimony all the more important this week, though. We have a plethora of Fed speakers this week, but Mr Powell will be the most important. He will need to choose his remarks very carefully to avoid a mini taper-tantrum sweeping markets, that are edgy on inflation metrics and price rises already. I expect that Mr Powell will be a dovish as can be but will not signal discomfort with the present levels of the US yield curve’s long end.
Much noise has been made about asset price bubbles in recent days, which I think is overdone. You could argue we have been bubbling since QE started during the global financial crisis, and that central banks did a very poor job weaning the financial system off free unlimited money. Yet here we are, and the pandemic ensures such an exercise, if it can ever happen now, is still a long way off. Central banks will keep the zero per cent spigots going at the short-end of the curve and I continue to believe US 10-years would need to be near 2.0% to cause the global equity rally to wobble. After all, stocks were still rallying when rates were last at that level.
This week, US Personal Consumption Expenditure data is likely to show a large jump given the Retail Sales outperformance last week. US second read GDP is also likely to impress, a trend that will accelerate as the US starts to reopen. It will be the Powell testimony though that will have the most weighting for markets.
By contrast, CPI data from Singapore, Malaysia and Hong Kong will highlight the global recovery’s two-speed nature. All three should post negative CPI growth, which follows a similar pattern to Europe, China, South Korea and Japan. While the manufacturing/export sectors fire on all cylinders, domestic consumption remains cautious and savings rates high. Something unlikely to change until international borders reopen. That is exacerbated by the interest rates being negative to zero at the short end globally. Inflation is concentrated to specific sectors and countries, except for oil prices. There are no signs of wage/price spirals anywhere. So inflationary fears are overdone and moves lower in asset markets are likely to be corrections in a greater bull market.
Bitcoin and cryptos continue to grab the attention of traders around the world. Bitcoin rose around 3.0% over the weekend and is trading around USD57,000 of tax-payer revenue backed US dollars today. It seems that the more exponentially bitcoin prices rise, the noise regarding its acceptance as a “mainstream” asset rises. It will be interesting to see how much of that noise occurs when it corrects lower, as it must do at some stage. For all the talk of financial institutions facilitating crypto transactions, it is facilitating that is the key word. Facilitating does not mean acceptance; it means that a large customer who makes the banks a lot of fees says facilitate for me. The private banker naturally says, yes sir, please may I have another. Tradeable versus investable assets; there is a difference.
Looking at the bitcoin chart, which appears to be more an engineering diagram these days, a learned technical guru friend of mine is calling the top of an Elliot 3rd wave at around USD62,000 of taxpayer-backed fiat currency. More importantly, my primary data source of crypto market, Elon Musk’s social media account, seems to be aligning with my friend Max. Mr Musk posted “BTC & ETH do seem high lol.” I’ll stick my head out and say that bitcoin may be in for a temporary “lol” in prices if it trades above $60,000 of taxpayer-backed paper US dollars.