The weighting of the macro elements changed in February.
On the one hand, hopes for a growth-oriented 2021 remain intact. On the other hand, worries about inflation temporarily exceeding central bank targets dominated the second half of the month.
These concerns pushed up rates, especially for 10-year Treasury bonds. While we had talked about the 1% mark last month, the 1.5% mark was already crossed on 25 February.
Rising rates in the spotlight
This is a matter of weighting, as rates have been on the rise since November last year, time of the US election. Yet they are only now really appearing on the radar of concern. What is the reason for this shift?
The focus is once again on the US. They are ahead of President Biden’s stated schedule for vaccination to achieve herd immunity against Covid-19. Without worrying too much about mutations in the virus, the question is whether the economic recovery could already begin in April or May.
Could oil reach $100 a barrel?
This is good news on the face of it. But will there be a need for another large fiscal support package? Perhaps it will only fuel inflation. Always considered one of the main drivers of inflation, the price of a barrel of crude oil is at a level not seen since the beginning of the Covid-19 crisis, well above $60.
According to some banks, a $100 barrel in the longer term is not an unrealistic scenario. This could be the combined effect of a rise in demand due to the recovery and a shortage on the production side.
Inflation will not exceed 2% for three years
The FED remained faithful to its strategy of maintaining an accommodating policy, even if inflation were to momentarily exceed the 2% per year mark. It would only think about tightening if the rise in inflation were to prove sustainable.
Nevertheless, President Powell sought to calm things down by saying that inflation should not return to a level of around 2% for three years.
The ECB’s attitude is not much different: it is important not to nip the recovery in the bud by tightening financing conditions too soon. Nevertheless, after more than a decade of monetary expansion, the paradigm shift has not seemed so imminent for a long time.
Huge gap between industry and services in Europe
Yet European governments are struggling to procure and administer the necessary doses of vaccine to ensure the anticipated recovery in the second half of the year.
The outlook according to the purchasing managers’ indices (PMI) is much rosier in the United States. The 58.9 points for services represent the strongest expansion score since March 2015. The PMI for industry reached an all-time high in January (59.1) and is still in very expansive territory at 58.5 points.
In Europe, expectations for industry (57.7 points) are holding up well, thanks in part to a less gloomy outlook than feared in the automotive sector. Services, on the other hand, are fully affected by the lockdowns and are clearly in contraction territory (44.7 points, -0.7).
Europe bears the price of the lockdowns
As a result, the respective GDP growth estimates are also moving in opposite directions. Despite persistent consumer anxiety, growth for the US is expected to be stronger than expected and to return to pre-Covid-19 levels in the first half of the year.
In Europe, consumers, at least are not expected to return to their pre-crisis consumption levels until 2021. The belief that lockdowns are too expensive compared to the options of more regular testing or faster vaccination has not (yet) taken hold in Europe. Should this be the case in March (perhaps also because the variants are proving less threatening than feared), positive shifts are likely.
