Stocks Wilt Under Pressure From Rising Yields

America

The IMF's chief economist has weighed-in the debate in the US over fiscal policy. While some renowned economists like former US Treasury Secretary Summers and former IMF chief economist Blanchard have warned of the inflation risk, the IMF's current chief economist Gopinath defended Biden's $1.9 trillion efforts, counting on the deflationary forces of globalization and automation to limit upside price pressures. The Congressional Budget Office projected, based on the $900 bln effort at the end of last year, that US output would reach pre-pandemic levels by this summer.  

Speaking of US inflation, many focus directly on the inflation-protected securities or indirectly on the difference between those yields and conventional yields. Yet many people who complain about the distortions of the price-discovery process of the Federal Reserve's actions seem to take the TIPS market at face-value. This assumption needs to be picked at as the Fed now owns around 23.4% of all TIPS, from 10% before the pandemic.  

A quiet start is likely for the busy week in North America. The US reports the February Dallas Fed's manufacturing survey and January's Leading Economic Indicator Index amid growing expectations for a robust Q1 21 GDP. Ahead of Fed Chair Powell's congressional testimony that starts tomorrow, Dallas Fed President Kaplan and Fed Governor Bowman speak today. Fed officials seem in agreement that there is no need to taper purchases ($80 bln in Treasuries and $40 bln in Agency MBS a month) and are focused on the slack in the labor market. Both Powell and Treasury Secretary have estimated that the unemployment rate is really closer to 10% than the 6.3% reported as many have stopped looking for work. More people are filing for initial unemployment benefits than at what was the record peak in the Great Financial Crisis.  

The US dollar fell to a new low against the Canadian dollar since April 2018 earlier today (~CAD1.2580) before rebounding to almost CAD1.2655. The Canadian dollar is among the most sensitive major currencies to the equity market. The greenback has spent most of the past two months between CAD1.26 and CAD1.28.Initial resistance today is seen near CAD1.2665 and then CAD1.2700. Rising global interest rates, the seemingly weak government response to the pandemic, and distrust of the AMLO government by private investors have seen the Mexican peso fall out of favor. Over the past month, the US 10-year yield has risen by about 28 bp while Mexico's 10-year dollar bond yield is flat. It sold-off every day last week, and its losses are being extended today. It fell 2.3% last week and is off half as much today. The dollar reached almost MXN20.7150 today, its highest level since early November. The next technical target is around MXN20.7650, and above there, resistance is not seen until MXN21.00-MXN21.05.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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