23 February 2021
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The reflation trade continues to play out

The focus today will be on Fed Chair Powells testimony to the Senate Banking Services Committee.

By Daniel Richards

  • Equity markets were lower almost across the board yesterday as bond yields continued to move higher in the reflation trade, with tech stocks particularly hard hit.  Firmer US data as well as the prospect of significant additional fiscal stimulus in the US was the main driver, as the House of Representatives prepares to vote on the Democrats’ USD 1.9tn package this week.  The proposed legislation includes USD 1400 in stimulus cheques, extended unemployment benefits, a minimum wage increase and additional funding for state and local governments, as well as more money for vaccines, schools and small businesses.
  • All eyes will be on Fed Chairman Jerome Powell today as he speaks to the Senate Banking Committee. He is expected to strike a dovish tone, reiterating the Fed’s view that inflationary pressures are transitory and that monetary policy will remain accommodative until the economy returns to full employment.
  • In a webinar hosted by the New York Times, Treasury Secretary Janet Yellen again reiterated support for the proposed USD 1.9tn stimulus package and said that President Biden favours higher corporate taxes rather than a wealth tax to pay for a longer-term infrastructure development plan.  She also indicated that a higher capital gains tax could be “worth considering”.
  • The US leading economic index and Dallas Fed’s manufacturing activity index both rose by more than expected in January and February respectively, another signal of improving US growth momemtum. The Dallas Fed manufacturing activity index surged to 17.2 this month from 7.0 in January, the highest reading since October 2020.
  • In Europe, ECB President Christine Lagarde said the Bank is “closely monitoring” government bond yields in the Eurozone, suggesting the ECB may intervene if higher yields risk undermining the economic recovery.
  • The German IFO Business Climate Index rose to a higher than expected 92.4 in February, with the January reading revised up slightly to 90.3 as well.  Most of the improvement was due to better expectations – this index rose to 94.2 from 91.1 in January - as more vaccines were rolled out in Germany and the rate of new coronavirus infections slowed. However, similar to the PMI survey, the manufacturing sector appeared to be the main driver of the higher Business Climate Index reading, with retail, construction and services remaining soft. 
  • PM Boris Johnson announced a four-step plan to reopen the economy in England, starting with schools on 8 March and ending with on 21 June with all restrictions lifted, provided the virus remained under control.  Outdoor hospitality and all retail businesses will be allowed to reopen from 12 April, while indoor hospitality (including hotels) and indoor sports events can resume operations from 17 May.  Travel restrictions will be reviewed from 17 May as well. The timetable will be followed if the vaccine rollout continues on schedule, hospital admissions remain manageable and there are no new strains of the virus which threaten to boost infections significantly. 

Today’s Economic Data and Events

  • UK ILO unemployment rate, Dec: 11:00 forecast 5.1%
  • Eurozone CPI, Jan: 14:00 forecast 0.2% m/m and 0.9% y/y
  • US Conference Board consumer confidence index, Feb: 19:00 forecast 90.0
  • US Richmond Fed manufacturing index, Feb: 19:00 forecast 16

Fixed Income

  • Benchmark bond markets saw a choppy day of trading as comments from ECB President Christine Lagarde on the current rise in bond yields helped to put a momentary floor under the persistent sell-off. However, by the end of the day UST yields recovered and closed higher: 2yr UST was up by less than 1bp at 0.1109% while the 10yr added almost 3bps to close at 1.3653%.
  • Jerome Powell will give testimony to Congressional banking and finance committees this week where he will likely reiterate his views that inflationary bumps will be transient this year. Markets will be tracking closely whether he will address the current run up in yields.
  • CBQ has mandated banks for a USD benchmark issue.


  • Dollar selling was the theme of the second half of the day on Monday with the greenback giving up ground against all major peers. Currency markets will also be tracking Powell’s testimony to Congress with expectation that he may double down on dovish rhetoric.
  • The Euro gained for a third day running, up 0.3% at 1.2157 overnight while JPY is now testing a push below the 105 handle. Sterling is consolidating its levels above 1.40, rising 0.3% overnight and tentatively higher this morning. AUD and NZD added ground against the USD overnight, up 0.6% and 0.4% respectively while the CAD is gaining this morning after no change overnight.


  • Global equity markets sold off yesterday as reflation worries returned to the fore. The NASDAQ, one of the biggest gainers since the pandemic crisis began, lost -2.5%, though that does leave the index up 5.0% ytd still. The S&P 500 closed -0.8% lower, while the blue chip Dow Jones managed to close almost flat, eking out gains of 0.1%.
  • The sell-off had begun in Europe, where the composite STOXX 600 lost -0.4% on the day. The Italian FTSE MIB was one of the biggest losers, down -0.6% as the optimism around the new government continues to fade. The CAC lost -0.1% and the DAX -0.3%.
  • In the UK, the FTSE 100 closed -0.2% lower, despite the roadmap to reopening the economy presented by Prime Minister Boris Johnson to parliament in the afternoon.
  • Within the region, the DFM closed -1.0% lower while the Tadawul lost -0.1%.
  • Asian equities have shrugged off the negativity this morning, with indices in China trading higher after losses yesterday.


  • Oil prices were up strongly at the start of the trading week with gains not far off 4% in both WTI and Brent markets. Both contracts are rising strongly today with WTI up 2.1% at USD 62.78/b and Brent adding 2% at USD 66.55/b.
  • There were few fundamental catalysts to push the market higher overnight beyond the lingering resumption of output from fields in the US that had been affected by freezing weather. OPEC+ dynamics will set the tone for oil in the coming week ahead of the next ministerial meeting at the start of March.

Click here to download charts and tables






Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

Khatija Haque Head of Research & Chief Economist

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