Stocks began the week on the front foot amid signs the reflation trade has further to run and as the pace of coronavirus outbreaks slowed further. WTI crude breached USD60 a barrel, as an arctic freeze gripped parts of the U.S.
The reflation trade remains alive and well, when global equities have risen for 10 straight sessions, and the Treasury yield curve tested the steepest levels in more than five years. Investors are banking on U.S. government spending and the coronavirus vaccine rollout to boost the economic recovery, though new variants are threatening to temper the outlook.
The reflation trade is set to continue to gather steam with vaccine deployment and massive fiscal spending by the Biden administration. Yields are likely to rise further and the catch-up of cyclical sectors should continue. Ten-year Treasury yields are at highs since March of last year, while the S&P 500 rose to a record again. And this has been accompanied by falling volatility with the VIX dipping below 20.
The University of Michigan’s 1-year inflation expectations came in at 3.3%, the highest since July 2014, after last week’s muted January CPI initially put a dampener on the reflation theme. And part of this has been due to supply-related rise in inflationary expectations as oil has rallied for ten out of the previous 11 sessions. Plus, Biden’s stimulus package continues to make its way through Congress.
U.S. Treasury Secretary Janet Yellen stressed the need for the G-7 member countries to “go big” with fiscal stimulus to support economic recovery from the global pandemic. In her first call with foreign counterparts and central bankers from the G-7, Yellen said that “the time to go big is now” and that the group should focus on how to help the economy, the U.S. Treasury Department said in a statement after the virtual meeting was held on Friday.
The U.S. is leaning toward backing an increase in the IMF’s special drawing rights, or SDRs, by as much as USD500 billion, Bloomberg News reported earlier this month. The fund has been lobbying for more help to support developing nations against the Covid-19 crisis.
The G-7 discussed increasing the IMF’s resources during Friday’s call, and the group expects a decision to be announced later this month on the back of a G20 discussion, according to one person familiar with the matter. The finance ministers’ goal in Friday’s talks was to build momentum around helping developing nations, the person said on the condition of anonymity.