Financial markets are not immune to reopening angst. Fear of overheating and of excessive leverage are factors behind the recent souring in risk aversion. This does not change the macro story in our view, and PMIs/ISMs today should be a reminder of that.
How hot is too hot?
An update on rate markets has to include an attempt at explaining of the recent souring of market sentiment, most prominently yesterday. There is more than one possible explanation but we suspect markets are suffering from a version of the reopening angst that many workers will feel when asked to return to their offices.
Even if data went through a period of slower improvement in economic activity, PMIs/ISM and other diffusion indices printing in the 60’s can hardly be considered bad news. This is particularly true as each successive elevated reading reduces the probability that comparison with depressed levels boosted the indicator. More broadly, economic data of late seem to have confirmed that the recovery in some corners of the world, for instance in the US and Europe, is picking up pace. Job indicators this week should be another confirmation of that.
The recent surge in prices and capacity constraints might act as a break on activity
Without going through the specificities of each sector of the economy, it is conceivable that too sharp an adjustment higher in economic activity sows the seed of its own abrupt end. Take commodities or chip shortages for instance, the recent surge in prices and capacity constraints might act as a break on activity on key sectors of the economy. One does not have to expect an abrupt tightening of monetary policy to see how this could adversely affect risk appetite.
Risk aversion has flattened yield curves this week