Financial Markets Monthly - April 2021

Early-2021 trends of rising government bond yields and strong equity markets continued in March. 10-year US Treasury yields were up 80 basis points in the first quarter and are now 120 bps above last summer’s lows, an increase that’s nearly on par with 2013’s taper tantrum (though the latter occurred in just half the time). Higher yields didn’t prevent the S&P 500 from crossing the 4,000 mark for the first time in its history, and a recent RBC Capital Markets survey found half of US investors are still bullish or very bullish despite high valuations. The common denominator is an improving economic backdrop as vaccine distribution ramps up and fiscal and monetary stimulus continue to flow. The IMF recently upgraded its global growth forecast by half a percent in 2021 and 0.2 percentage points in 2022, led by stronger expansion in advanced economies.

But for some the near-term outlook is clouded by a third wave of COVID-19 infections. A number of European countries and several Canadian provinces are once again tightening restrictions to combat the spread of variants. The opposite is true in the US and UK where significantly faster vaccine rollout and (in the UK) strict containment measures have thus far kept a third wave at bay. Even so, fixed income investors are taking a bit of a breather in early April, waiting to see the direction of case counts and restrictions.

While much of the selloff in longer-term bonds is likely behind us, we see yields continuing to drift higher (with the curve flattening) over the course of 2021. That will continue to be led by the US where significant fiscal stimulus is adding to the economy’s momentum. The Fed has done little to push back against rising yields though we expect it will adopt a more hawkish tone later this year as robust growth materializes, setting it up to be first out of the gate with rate hikes in 2022. The US’s emergence as a growth leader—it saw one of the IMF’s biggest forecast upgrades—has supported the US dollar, which rose for a third straight month and posted its strongest gain in a year in March. We expect the dollar will continue to appreciate over the course of 2021.

Highlights:

  • Stimulus checks and ongoing easing in containment measures (supported by strong vaccine rollout) has helped the US recovery maintain momentum in 2021.
  • If the Fed’s strong growth projections come to fruition—and we think they will—it will have to re-evaluate its guidance that rate hikes are unlikely before 2023.
  • Canada’s economy continued to grow in early-2021 but that resilience will be tested by a third wave of COVID-19. Despite near-term risks, we expect the BoC will taper its QE program in April.
  • The UK’s strict containment measures have helped flatten the case curve and widespread vaccinations are allowing the economy to re-open—we expect solid GDP gains in Q2 and Q3.
  • Several major European economies are going back into lockdown. Vaccinations need to ramp up to ensure the third wave is the continent’s last.

 

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Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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