| Andy is taking a well-deserved break this week from the FX commentaries. You are in the hands of the old guy this week. Thankfully, we got ample evidence on Sunday at the Super Bowl that old guys can still have it. I am not denying, though, that it may take an extra cup of coffee this morning.|
Markets seem to be back in the hands of the older generation this morning, with the “Reddit stocks” steady this morning. The sense in the markets seems to be that this episode is over, until it happens again of course.
The sleeper story of the day came over the weekend in the French newspaper Le Journal du Dimanche in an interview with European Central Bank (ECB) President Christine Lagarde. After the mandatory defense of Europe’s monetary and fiscal response to the pandemic’s wreckage of the economy, she said, “Once the pandemic is over and the immediate economic crisis is behind us, we will have a tricky situation on our hands.”
Yes, Madame Lagarde, you will.
She went on to say that we must “not repeat the mistakes of the past by cutting off fiscal and monetary stimulus at once” but must withdraw stimulus gradually. But she added, “Economies will then have to learn how to function again without the help of any of the exceptional measures that had to be introduced as a result of the crisis.”
The market narrative that predominates all economies is that central banks need to keep all easy money flowing. That market narrative is also betting that the second half of 2021 is going to be one big, long Mardi Gras. If anything like that happens in any form, central banks will have to at least start entering the discussion of their plans to pull back. Investors are all in on their bets that equities will rise as well as inflation. The 10-year breakeven rate in Treasuries — the difference in yields between a 10-year Treasury note and its inflation-protected version — reached 2.21% today. Until the turn of the new year, that metric had not broken 2%.
Data calendars are pretty light this week. Markets will be a bit more focused on earnings and central bank speakers. Also, as the week goes on, we will be following the evolving story of another veteran returning to the playing field — this time it is the return of former ECB President Mario Draghi to the spotlight in his effort to guide Italy through its financial mess.
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