Week Ahead – Rising Yields Spook Markets

Fundamental analysis of Forex market

Powell fails to ease concerns

Everyone is watching the bond markets at the moment, as yields accelerate higher and investors become increasingly anxious. That is dominating the headlines and it’s unlikely to change next week, with the jobs report on Friday now even more significant.



It seems Wall Street is much more confident about the economic recovery than the Fed and if we see a better-than-expected employment report that could deepen the bond market selloff.  The US nonfarm payroll report for February is expected to show a 133,000 gain in jobs, which would be an improvement over the 49,000 increase in January.

Risk appetite will continue to react closely to what happens in the bond market and more importantly with Fed speak.  The surge in Treasury yields has yet to become a significant risk for the Fed, but that won’t be the case if the current trajectory in yields continue.  The Fed will jawbone or possibly deliver some action soon since real yields are probably much higher at this point in the cycle than what they would be comfortable with.

The battle in Congress over President Biden’s COVID relief bill will heat up.  Republicans have a small victory over a minimum wage increase.  The Senate parliamentarian ruled against allowing the $15 minimum wage increase in the relief bill.  The debate over the size of the relief bill will likely see the size go from $1.9 trillion to something in the ballpark around $1.4 trillion.  Financial markets are planning Congress to deliver relief by mid-March with next week being critical for talks.


EU debt markets have been caught up in the yield frenzy, despite inflation data this past week showing no signs for concern. This is a region that hasn’t had any inflation of note for many years and a central bank that is unlikely to be responsive to temporary inflation driven by a demand surge and base effects this year.

There’s plenty of data to come over the next week though as investors seek out the slightest sign of inflationary pressures building. Flash CPI data on Tuesday is the obvious but also PMIs on Monday and Wednesday, retail sales and unemployment on Thursday and a few other tier two and three releases across the week. 


The pound continues to be one of the star performers at the moment, with the vaccine rollout in the UK driving the enthusiasm towards the currency. The government laid out its plans for reopening the economy this past week and aims to be fully operational by 21 June.

The budget will be next week’s standout event as the Chancellor lays out plans to supercharge the recovery and provide additional support until the end of restrictions. It won’t all be good news though, with selective tax hikes expected to be included including plans to raise corporation tax over the course of their term, perhaps as high as 25%. PMIs on Monday, Wednesday and Thursday are also of interest.


The lira has been slipping against the dollar this week for a couple of reasons. For one, EM currencies have generally performed badly in the face of higher US yields. Secondly, there appears to be some concerns appearing about whether the central bank should be hiking rates again to stave off higher inflation.

This week the CBRT raised the reserve requirement in order to support the currency. An action that some have suggested may indicate a reluctance to hike rates again. It came in the same week that President Erdogan defended his son-in-law and former Finance Minister for the actions that burned through reserves in a desperate attempt to support the currency and negate the need to rate hikes.

The combination of the two events appears to have cast doubts again on the policy direction and so the central bank may be forced into hiking rates again soon or risk seeing the currency head south once more.


Heavy data week for China starting with official PMI’s on Sunday. Low readings in the currency environment could prompt an aggressive equity sell-off on Monday. Caxin PMI’s Monday and Wednesday could show slowing post CNY activity adding to the gloom.

China’s annual Political Consultative Conf. and National People’s Conference occur on Thursday and Friday. GDP growth target will be dropped but other 5-year plan targets could cause volatility. Notably self-reliance, domestic consumption and anti-monopoly. The latter could impact the likes of AliBaba and co.

The PBOC has kept the USD/CNY fixing almost unchanged around 6.4600 this week, despite signs of Dollar strength in the DM space. If the PBOC decides to weaken the Yuan in response to the US bond-tantrum this week, it could set off a cascading sell-off of regional Asian currencies.


India PMI’s should show a slight improvement following GDP last week. Ceasefires with China in the Himalayas and Pakistan in Kashmir were market positive.

The bond market tantrums leave India more acutely exposed than most to Asia EM-tanturm due to its debt and currency account position. India, Indonesia and the Philippines are the most vulnerable markets in this respect.

Australia & New Zealand

The RBA rate decision next week will be unchanged and no change is expected to the QE programme. Australian data remains robust despite the China bans, but markets will be expecting a very dovish statement after CGB yields spiked higher this week. The US bond market tantrum has lifted yields globally and cyclical darlings such as the AUD are vulnerable to a deep pullback. AUD/USD is down nearly 2.0% in the last 24 hours and if 0.7700 fails next week, the AUD/USD is set for a deep correction.

The New Zealand Government has instructed the RBNZ to factor New Zealand’s overheated housing market into future rate decisions. That lifted the NZD this week and also government bond yields. The US bond-tantrum has reversed the currency but not NZ bond yields. US yields have caused US Dollar strength pushing NZD/USD 1.50% lower. Failure of 0.7200 opens up a much deeper correction as a high beta currency to the global recovery and commodity cycle thus far.


Heavy data week with PMI’s, current account and bank lending. ALl eyes will be on the US bond markets though. The 10 and 30-year JGB auction bid to cover ratio will be closely watched by a nervous market, after JGB yields moved to the top of the BOJ band this week. Low bid to cover ratio will be equity and Yen negative.

Nikkei 225 has retreated from 30-year highs above 30,000 to 29,300. 4-month support is nearby at 29,000 and a failure will likely spark a capitulation by the very-long at the top retail sector.Initial target is 27,000. Equity markets remain vulnerable to developments in US markets.

A further rise in US yields next week could spark a rally by USD/JPY to 108.00, although repatriation flows by Japan institutional investors and exporters will slow its pace.

Key Economic Events

Saturday, Feb. 27

  • Berkshire Hathaway posts its annual report and Chairman Warren Buffett’s letter to shareholders on its website.

Sunday, Feb. 28

  • Former President Trump speaks at the Conservative Political Action Campaign conference on the future of the Republican Party

Economic Data

  • China Feb Manufacturing PMI: 51.1 estimate v 51.3 prior: Non-Manufacturing (Services): 52.1 estimate v 52.4 prior

Monday, March 1

  • New York Fed President Williams speaks at a virtual conference.  Atlanta Fed Presidents Bostic, Cleveland Fed President Mester and Minneapolis Fed Kashkari participate in a panel discussion on racism and the economy, with a focus on housing.
  • ECB Vice President Luis de Guindos and Governing Council members Gabriel Makhlouf and Francois Villeroy de Galhau speak at an online conference on macroprudential regulation.
  • CERAWeek 2021: next CEO of Amazon.com, Andy Jassy and OPEC Secretary General Barkindo to speak at 5-day event

Economic Data

  • US construction spending, ISM Manufacturing
  • China Caixin manufacturing PMI
  • Manufacturing PMI Day for the US, France, Germany, Eurozone, UK, Canada, India, Mexico, Thailand, Czech Republic, Russia, Poland, Italy, and Australia
  • South Africa manufacturing PMI
  • Germany CPI
  • Italy CPI
  • Japan vehicle sales, Manufacturing PMI
  • UK mortgage approvals
  • Australia AiG performance of manufacturing index, Melbourne Institute inflation gauge
  • South Korea trade
  • Turkey GDP

Tuesday, March 2

  • Fed Governor Brainard takes part in a virtual discussion hosted by the Council on Foreign Relations and San Francisco Fed President Daly speaks to the Economic Club of New York.
  • European Commission President von der Leyen speaks at a diversity conference in Germany.

Economic Data

  • US vehicle sales
  • RBA Interest Rate Decision: Expected to keep Cash Rate Target unchanged at 0.10% and 3-year yield target at 0.10%
  • Australia BoP current account balance, building approvals
  • Czech GDP
  • Hungary GDP
  • Canada GDP
  • Eurozone CPI
  • Germany Feb Unemployment Change: -17.5k estimate v -41.0k prior
  • Spain Unemployment
  • UK Nationwide house prices
  • Japan jobless rate, monetary base, capital spending
  • Singapore PMI

Wednesday, March 3

  • UK Chancellor of the Exchequer Sunak delivers his budget to Parliament.
  • German Chancellor Merkel will discuss a cautious reopening with state leaders
  • Philadelphia Fed President Harker takes part in a virtual discussion on an equitable workforce and Chicago Fed President Evans discusses the economic outlook
  • BOE policy maker Tenreyro speaks on a webinar discussion about negative rate policies.
  • EIA Crude Oil Inventory Report

Economic Data

  • US Feb ADP Employment Change: 165K estimate v 174K prior, Fed releases Beige Book
  • Canada building permits
  • Australia GDP
  • Italy GDP
  • Mexico central bank quarterly inflation report
  • China Caixin services PMI
  • UK Services PMI
  • India Services PMI
  • Russia Services PMI
  • Singapore Markit PMI
  • Australia AiG performance of construction index, Markit PMI
  • New Zealand building permits, ANZ commodity prices
  • Japan Services PMI
  • Turkey CPI
  • Russia CPI
  • Eurozone Markit services PMI, PPI
  • Poland rate decision: Expected to keep rates steady at 0.10%

Thursday, March 4

  • OPEC+ holds a ministerial meeting to discuss April output
  • ECB Governing Council Members Knot and Centeno participate on a panel at the Politico Finance Summit.
  • World Bank President Malpass participates in a virtual event: “Corporate Debt in Developing Countries: Managing a Rising Threat to Global Recovery.”
  • Sweden Riksbank Deputy Governor Skingsley takes part in a panel discussion on digital payments.

Economic Data

  • US factory orders, initial jobless claims, durable goods orders
  • Canada international merchandise trade
  • Australia retail sales, trade balance
  • Eurozone retail sales, unemployment
  • Hungary trade balance
  • Russia gold and foreign exchange reserves

Friday, March 5th

  • China’s annual meeting of parliament begins in Beijing. China will announce goals for 2021.
  • BOE policy maker Haskel speaks on a panel

Economic Data

  • US Feb Change in Nonfarm Payrolls: 133K estimate v 49K prior; Unemployment Rate 6.4% estimate v 6.3% prior Jan Trade Balance: -$67.5b estimate v -$66.6b prior
  • Hungary Industrial production
  • Thailand CPI
  • Russia CPI
  • Singapore retail sales
  • Australia Foreign reserves
  • France Trade data
  • Germany Jan factory orders m/m: 1.0% estimate v -1.9% prior
  • South Africa gross reserves
  • Australia AiG performance of services index
  • Switzerland foreign currency reserves

Sovereign Rating Updates

  • Finland (S&P)
  • Spain (Moody’s & DBRS)