BMO Nesbitt Burns
First Canadian Place
100 King St. W, 38th Floor
Volume 25, Issue 3
After blasting out of the gates to start the year, bond yields took a bit of a breather this week; 10-year Treasuries slipped a touch following a 20-bp leap last week. A variety of factors weighed in—some constructive, some less so. Risk sentiment broadly paused after a rip-roaring start to 2021, and the S&P 500 is now little-changed in the first two weeks of the year. A pair of weak U.S. economic releases played a big role in this sober re-assessment, specifically a jump in weekly jobless claims to 965,000 and a second hefty drop in retail sales in December, both much weaker than consensus.
The main message is that the U.S. economy may be struggling much more heavily with renewed restrictions than widely expected. No doubt, the uncertainty surrounding fiscal support—right up until the end of the year—may have also caused some short-term havoc with the economy. Note, too, that small business sentiment took a big step back in December, with the political backdrop likely playing an important role there as well. After what we expect will be a surprisingly perky Q4, with GDP growth north of 4%, the economy will likely struggle to post any growth in Q1. And, that’s even with the big helping hand of the $900 billion stimulus package. We suspect that the extra dose of stimulus spending proposed by President-elect Biden will be watered down and will ultimately have more impact on Q2 than the opening three months of the year.
The more constructive factor restraining yields this week was a run of dovish commentary from the Fed, first from Governor Brainard (low forever?), and then from Chair Powell. The key, and simple, message was that it simply was far too early to be even discussing tapering QE—although apparently not too early for some regional Presidents. While we expect a lively debate at the FOMC later this year on the pace of QE, actual tapering is expected to be a story for 2022. And, as Powell suggested on Thursday, the Fed will provide plenty of advance warning for the markets before they make the first cut in what has been an exceptionally aggressive and supportive bond buying spree.
Notably, even with the modest pullback in Treasury yields this week, underlying inflation expectations imbedded in the market continued to grind higher. The so called breakeven rate for 10s has climbed to 2.09%, up 10 bps just since the start of the year and well above the pre-pandemic level of around 1.8%. Rising oil prices have played a role; even with a late-week pullback, WTI is still above $52, up 25% from just two months ago and not far from a year ago. But there are plenty of factors gradually lifting inflation expectations (which Sal details below). Perhaps most importantly is the Fed itself, which has clearly committed to letting inflation run a bit above their 2% target for a spell before tightening policy. On that front, there is still work to do, as core CPI was flat at 1.6% y/y in December, while the core PCE deflator (and the Fed’s
target metric) remains a few ticks lower.
Our overall view is that yields will continue to grind higher this year, with the ultimate destination highly dependent on the ongoing race between the virus and the vaccine, as well as just how much of Biden’s proposed $1.9 trillion stimulus ever sees the light of day. The official forecast of a 1.25% level for 10-year Treasuries by end-2021 is clearly on the cautious side, and has yet to factor in additional stimulus measures above those already signed into law. At the same time though, we believe that ongoing heavy support from the Fed, and opportunistic foreign buying of Treasuries, will keep the rise in yields in check. Simply, the markets have largely priced in a solid and sustained economic recovery—while that largely aligns with our view, there is little doubt that there is still plenty of room for at least some modest disappointment to that sunny outlook.
Stalin-themed cafe in Moscow closed after public outcry
MOSCOW — A shawarma shop in Moscow was forced to close a day after it opened following an outcry over its provocative Josef Stalin-themed branding, the shop’s owner told Reuters on Saturday.
The Stalin Doner shop featured a portrait of the controversial Communist leader above its front door. Inside, a man dressed in the Stalin-era security service uniform served customers meat wraps named after Soviet leaders.
“We fully opened the day before yesterday and served around 200 customers,” shop owner Stanislav Voltman said.
“There were no legal reasons (to close the shop),” he added, but said that police had forced him to remove the Stalin sign and then “colossal pressure” from local authorities forced him to shut completely.
The branding was hotly debated on social media with some commenters condemning it as distasteful.
Stalin’s rule was marked by mass repression, labor camps and famine. Nearly 700,000 people were executed during the Great Terror of 1936-38, according to conservative official estimates.
However, many in the former Soviet Union still regard him primarily as the leader who defeated Nazi Germany in the Second World War, ensuring the country’s very existence.
“I had expected some social media hype,” Voltman said. “But I had not expected that all TV stations, all the reporters and bloggers would flock here and queue up like they do in front of the Lenin mausoleum.”