Current Rates Observations; Early Price Reactions To Earnings Expected

After month/quarter-end flows dominated price performances, and in a shortened week with no immediate catalysts post-US stimulus details, the current themes broadly hold.

Still, as we move into April, active management is more likely to drive portfolio performance as we head into earnings pre-announcement season. Given the extreme moves that are occurring, early price reactions to earnings will be keenly watched. 

For the first time in a long while, I  don’t have a strong view on near term stock markets performance—and after a strong run in Value,  it seems prudent to keep the powder dry to take advantage of extreme dislocations. The market feels topish but not overly stretched yet. Outside of bond yield moves (velocity vs. quantum), it is also interesting to note that US total Call volumes have waned of late, perhaps retail exhausting?

Still, whatever suggestion there was about  “everything being in the price” might not necessarily be the case. And by the looks of today’s price action, there is still potentially a long catalyst runway courtesy of the reopening and vaccine narrative. Not to mention the arrival of those stimulus checks should feed directly into corporate profits, which is not necessarily reflected in earnings yet. 
Indeed, markets remain incredibly resilient despite all the yield fears. 

Sleepy Hollow In FX Land

The third wave on the continent seems to be gaining some traction. The  seems unable to muster any move above 1.1750-60, but 1.1700 is holding in just fine. Interest might slowly fade going into the Easter weekend, taking liquidity with it.

Friday’s US could be a barnstormer on either a huge beat or miss, rather than chase, sit tight or sell rallies closer to 1.18. if so inclined. 

GBs Sell Off As BoJ Trims Rinbans

JGBs sold off as the Bank of Japan reduced the amount and frequency of rinbans across the whole curve by more than expected. opened at 150.94-22c and moved around the 90s ahead of the auction. The result of the 10y auction was quite strong. The market bounced 1.0bp by the result. However, some sold in 10y at the top.

Too Fast, Too Soon?

There are risks of an outsized move in response to a surprise in the payroll report coming out on a shortened, less liquid Good Friday trading session, so the street remains cautious of aggressively fighting what could arguably be considered overly aggressive tightening expectations through Friday. 

Still, at the end of 2023, the market is now pricing in closer to four hikes than three, which seems difficult to comprehend given that QE isn’t likely to end until late 2022 fully. From my seat, this unambiguously encapsulates the market rates ambiguities.. 

EUR rates in general backed up again this week, keeping pace with the move higher in USTs. Overall, the beta of EGBs to USTs was negligible in March compared to February’s levels. Yet, with the third COVID wave in Europe increasing mobility restrictions and raising the specter of nationwide lockdowns, the reopening recovery seems to be getting pushed out.

From a policy perspective, the market is still trying to understand what ‘significant increase’ in PEPP purchases committed at the March ECB meeting mean. Over the past two weeks, purchases have average €20bn, which is a 43% increase in the average weekly PEPP pace from Jan to mid-March.

In Australia, the focus will be on the RBA meeting. The street doesn’t expect any change in their forward guidance. While In New Zealand, the RBNZ continues to buy faster than the DMO is issuing.

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