Risk aversion remains the defining tone

• Risk aversion remains the defining tone as month and quarter end dynamics rule flows this week. Emerging market currencies experienced the largest routs amidst the USD rally; however, the G10 segment also universally underperformed. Equities observed another spurt of mild weakness, and US yields in the long-end of the curve edged slightly lower relative to Monday's NY close.

• USD: President Biden is expected to lay-out his infrastructure spending proposal on Wednesday in Pittsburgh. News reports suggest the components could total US$2.25tn, with earlier reports suggesting the initial package could add to US$3tn. That figure could be separate from an additional US$1.5tn plan that could be put forward in April that is also related to issues such as enhanced child tax credit. Taxes could be levied across the spectrum in an effort to minimize any deficit impact, however, it appears political opposition remains firm across both sides of the aisle. Given the domestic economy remains in a recovery phase, spending efforts could be front loaded while taxes are back loaded. In either instance, both taxes and spending may be protracted over a longer timeframe. Citi analysts continue to see risks as balance toward later passage and a smaller size.

• USD: All eyes are likely to be on the US nonfarm payrolls employment print this Friday. Citi analysts expect a solid 600k jobs added in March and the unemployment rate to fall to 6.0% as a continued pick-up in activity with further economic re-openings translating to increased rehiring. However, markets may be most sensitive to a downside surprise, with a widely shared expectation for a very strong report.

• JPY: Retail sales decreased 1.5% YoY in February after a 2.4% YoY fall in January, overshooting the median market projection for a 2.8% YoY drop. Sales saw a smaller YoY decline in February this year than a year ago, when there was one more business day due to the leap year. On a seasonally adjusted MoM basis, retail sales actually increased 3.1% in February after a 1.7% decline in January. The data suggest that sales held up well even under the state of emergency. As consumers have grown more accustomed to the pandemic situation, the state of emergency has been having a more limited impact on goods consumption. However, one should keep in mind that retail sales data do not capture service spending. Citi analysts believe spending on services (face-to-face services, in particular) took a greater blow from the resurgence of the pandemic and the associated second declaration of a state of emergency, as well as the suspension of the ”Go To” subsidy programs. As such, overall consumer spending looks likely to decrease fairly substantially in the first quarter (Citi expects -3.2% QoQ).

• EUR: The European Commission’s Economic Sentiment Indicator (ESI) was better than expected, with broad-based gains across sectors and countries, and painting a less negative picture of 1Q 21 than feared initially. Manufacturing out-performance continues, and is starting to benefit other sectors. The uniform rebound in price expectations is something that requires watching, despite the likely temporary nature of the rebound. Demand forecasts are improving, as are employment expectations. The ESI rose by 7.6 points to a 13-month high of 101.0 (Consensus 96.0, Citi 97.5) in March, moving above its historical average of 100 for the first time since February 20. The ESI averaged 95.3 in 1Q 21, up from 91.4 in 4Q 20, suggesting an upside risk to Citi analysts’ forecast that real GDP fell by 0.6% QoQ after a 0.7% QoQ decline in 4Q 20. 

Asia & Emerging Market Currencies

• CNH: FTSE Russell confirms China bond inclusion into the FTSE World Government Bond Index (WGBI) without further conditions. In September 2020 review, FTSE announced conditional announcement of China government bonds (CGBs) into WGBI at the end of September 2021. CGBs’ weight in the index at 5.25% is in line with expectation, given FTSE's recent adjustments of minimum outstanding amount for CGBs. With an estimated US$2tn of passive AUMs tracking WGBI, the inclusion could bring in about US$105bn of passive inflow into the CGBs. However, the implementation schedule is more conservative: a) the start date is postponed by about a month to 29 Oct 2021 (in light of Golden Week in early October), and b) the phase-in period is lengthened from 12 to 36 months. The slower pace of phase-in slows the pace of estimated passive inflow from US$8.75bn/month (over 12months) to US$2.9bn/month (over 36 months). The slower pace of inflows may disappoint bond markets a little, but it may not be a material concern as active index investors could invest regardless of actual index weight, relatively little dependence of bond market on foreign investors and overall diversified set of passive index investor base across indices.

• MYR: FTSE Russell announced the removal of Malaysia from its watch list. This confirms the positive assessment of Malaysia bond market structure and removes the residual threat of bond index exclusion for Malaysia bonds. While this threat was significantly reduced since the favorable assessment in September 2020 review, Malaysia was still retained on the watch list then. By extension, this confirms Malaysia bonds membership in the FTSE WGBI (weight of 0.39% w/o China, 0.37% /w China).

• INR: INR lags -1.2% to trade around 73.38. Second COVID-19 wave appears to intensify in India but there are no alarm bells on activity. It has taken 10 fewer days for active cases to go from 140k to 150k in the second wave compared to the first wave. Active cases are also more than 4-times their February lows in 12 states, accounting for almost half of India’s GDP. Nonetheless, mobility data shows restriction on activity has remained localized. Estimates of ICU bed utilization suggests pressure on health facilities are likely to remain limited in most areas despite the latest surge. Vaccination momentum has also increased to around 2.2 mil/day over the last week. At the current rate, India could administer ~700 mil doses by year-end.