US spending dips in February

• US consumer spending dropped 1.0% m/m in February, marking the sharpest drop in 10 months as a cold snap gripped many parts of the country. The data from the Commerce Department showed a broad decline in purchases of goods as the boost from a second round of stimulus checks to middle- and lower-income households faded. That followed a 3.4% m/m rise in consumer spending in January. The data showed spending on goods dropped 3.0% m/m, led by declines in purchases of pharmaceutical products and recreational items, while spend on services was up 0.1% m/m as consumers spent more on utilities and healthcare at hospitals, offsetting a decrease in spending at restaurants. The outlook for consumer spending however is improving over the following months, as temperatures in the US rise, qualified households receive additional USD 1,400 cheques and the government safety net for the unemployed extends through September 6th.  
• The US personal consumption expenditures (PCE) price index excluding the volatile food and energy component was up 0.1% m/m in February after rising 0.2% m/m in January, and increased 1.4% y/y after increasing 1.5% y/y in January. The core PCE price index is the Fed's preferred inflation measure for its 2% target (a flexible average). When adjusted for inflation, consumer spending decreased 1.2% m/m last month after jumping 3.0% m/m in January. Despite the drop in so-called real consumer spending, consumption in the first two months of the first quarter is running well above the fourth quarter average. Prices are expected to accelerate in the coming months owing to the broader re-opening of the economy as well as very accommodative fiscal and monetary policy.
• After weeks of rising government bond yields driven by worries about inflation, Bank of England rate-setters Michael Saunders and Silvana Tenreyro on Friday played down risks of a sustained surge in inflation when Britain's economy recovers from its pandemic crash, with Tenreyro saying more stimulus might yet be needed. Tenreyro acknowledged an improving outlook but pointed to scenarios that might require additional monetary stimulus later this year, also saying it was important to differentiate between a sustained increase and temporary pick-ups in inflation. Saunders said the economy may have more room than the BoE predicted last month to recover without generating excess price pressure. Their comments underscored the Monetary Policy Committee thinking that a sustained surge in inflation is not top of the list of risks as Britain recovers from its biggest economic slump on record.
• The German Ifo institute said its business climate index zoomed up to 96.6, the highest reading since June 2019, from an upwardly revised 92.7 in February, as rising demand for manufactured goods keeps factories in Europe's largest economy busy despite the pandemic and lockdown restrictions. Companies have become less pessimistic about the coming six months. The expectations component rose to 100.4 points from a revised 95.0 points in February the Ifo said. In manufacturing, the business climate continued to recover, rising to 24.1 points in March from 16.4 points in February. Companies were considerably more satisfied with their current business and their expectations were the most optimistic they have been since November 2010, according to the Ifo. The index for services rose to 6.5 in March from minus 2.2 in February, however hotels, restaurants, and tourism sectors continue to face challenges according to the institute.

Today’s Economic Data and Events

10:00  GB Nationwide HPI (YoY) Forecast 6.9%   

10:00  GB Nationwide HPI (MoM) Forecast 0.7%

Fixed income

• Following the rout in US benchmark bond markets in recent weeks that saw yields hit pre-pandemic levels there was a sigh of relief as a shift towards greater risk-on tone last week saw the sell-off wane and yields close lower. The US 10yr closed at 1.68%, down four basis points on the previous week, though higher than the 1.61% it had dipped to on Wednesday.
• In Turkey, yields on the 10yr ended the week at 17.9%, compared to the previous week’s close of 13.6% - although this marked a modest improvement from the 18.3% hit earlier in the week. Turkish markets are still reeling from the surprise dismissal of previous TCMB Governor Naci Agbal last week, and the business as usual messages from the newly installed governor have not yet calmed concerns.

FX

• The dollar index recorded another weekly gain last week, closing up 0.9% against peers to close at 92.766. Elevated bond yields and a positive outlook for the economic recovery this year on the back of government stimulus and an effective vaccination rollout are all bolstering the greenback, even as the Fed pushes back against any prospect of unwinding QE or raising rates – and certainly not without good warning.
• The positive story in the US is not being replicated in Europe, where rising Covid-19 cases, a sluggish vaccination rollout and internal and external disputes are all weighing on the economic outlook and the euro. The single currency lost -0.9% against the dollar last week, to close at 1.179.
• In the UK, the optimism that fueled sterling’s gains earlier in the year appear to have fizzled out for now, and the pound lost -0.6% against the dollar last week to close at 1.379.

Equities

• A shift to more risk-on sentiment at the close of the week saw US equity markets mitigate or completely offset the losses seen over the previous days, and in the end it was only the NASDAQ which closed down w/w, with a drop of -0.6% despite a 1.2% rise on Friday. The S&P 500 closed up 1.6% w/w (with a 1.7% boost on Friday), while the Dow Jones closed up 1.4% w/w, again driven by Friday’s gains. Although US consumer spending fell by more than expected in February, the USD 1,400 payment in March is expected to have driven a further rise this month.
• It was a similar story in the primary European equity markets, which shrugged off rising Covid-19 case numbers to see strong gains on Friday, pushing them into w/w gains for the most part. While Germany’s DAX lost -0.2% w/w, the STOXX 600 and the CAC both gained 0.9% w/w, while the FTSE 100 closed 0.5% higher w/w after gaining 1.0% on Friday.
• By contrast, even the strong gains recorded on Friday were not sufficient to push the major Asian equity markets into the black w/w. Only the Shanghai Composite closed up with a gain of 0.4% driven by a 1.6% surge on Friday. Meanwhile, the NIFTY, the Nikkei and the Hang Seng closed down -1.6%, -2/1% and -2.3% w/w respectively.

Commodities

• Oil market performance was mixed last week, with WTI closing down -0.7% w/w at USD 61.0/b, while Brent futures gained 0.1% to close at USD 64.6/b. The largely unchanged prices somewhat belie the volatility seen during the week, however, with intraday swings of as much as 6% in both benchmarks.
• The outlook for summer travel in Europe has been prompting renewed demand concerns, but this has been offset by the blockage in the Suez Canal in recent days, and Brent gained 4.3% on Friday. While the waterway is not as directly vital for the oil trade as it once was, the fact that it does not appear as if it will be soon resolved means that there will be wider disruptions to global shipping and trade.

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