When the Bears join the perennial Bulls in the China shop, something has to break
Bond markets have now bought in to higher yields and other asset classes need to get used to that idea. Macro Thoughts March 18, 2021
Higher inflation, along with consumer uncertainty, threatens the employment recovery and restricts wage increases, while higher production costs will reduce profit margins and CAPEX. Japan has been tackling low inflation and labour shortages for decades. In this year’s annual ‘shunto’ spring wage negotiations, Japanese companies have offered the lowest pay rises for eight years, having previously offered 2% or more, to help the government’s efforts to eradicate two decades of deflation. MBS convexity hedging is likely to kick yields towards our next levels of 1.88%, 2%, and above.
As we cautioned, the rise in inflation and bond yields, and the strengthening of the Dollar, is quickly impacting on Emerging Markets and those countries that are behind in vaccine distribution. In February, we highlighted Italian auctions that had demand below 0.20%, which we saw as a reason to sell, with the ECB potentially unable to act to defend higher European peripheral bond yields. 10 years have since risen from 0.45% to 0.80%, though to some degree this is lagging rising yields in Emerging Markets....
The fastest inflation in 4 years and a weakening currency has forced the first G20 central bank to tighten policy in 2021, as Brazil raised rates by 0.75% to 2.75%, their first hike since 2015. They didn’t raise rates with the Fed in 2018, but have now signalled another 0.75% rise at their next meeting.
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