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US equities were weaker Friday while US 10-year yields rose a further 4bps to 1.34%. Those moves were capping off the overriding trend in markets last week: growing concerns about inflation risks pushing nominal bond yields higher and weighing on the equity rally.

The Biden administration continues to stay on message stressing Congress’s need to pass a significant fiscal package downplaying recent more robust economic data as its full-throttle as a package exceeding US$1.9 trillion heads for a House vote this week in a fast and furious attempt to get the US back to full employment next year.

The unprecedented and highly stimulatory policy is an attempt to exceed one million jobs a month from April to September. Still, it underscores the narrower timeline from easing to tightening than post-GFC. And suggest taper tantrum fears are understandable even if severe inflation is still a 2022 issue.

But timing is everything. The next leg of the reflation will have to be carried more and more by a continued recovery in economic growth, as fiscal and monetary stimulus gets increasingly packed into the price, and all the while, this will bring the US Federal Reserve closer to acknowledge that policy normalization is coming.

In China, the People’s Bank of China ( PBOC) restates its position overnight as “neither too tight nor too loose”.

However, the problem for markets is the conflation of near-term liquidity management by the PBOC with a change in monetary policy direction. Unfortunately, although the CNY-related noise should fade, you’ll need to get accustomed to the on again off again implied policy normalisation lulls and crescendos, creating a level of policy uncertainty that is never great for risk.

The real question here is that in the absence of inflation on the ground, is the market willing to look through higher yields because it sees a better and much improving economic outlook at the end of the reopening tunnel? Or will the market decide that the Fed might taper in late 2021?

Expectations run high for oil markets

What began as a power issue for a handful of US states quickly turned into a global supply shock for the oil markets. Still, the re-start of shut-in US production and news that the Biden administration is exploring diplomatic re-engagement with Iran have contributed to a cooling of oil prices, despite the bullish inventory data.

But “the day after “, see oil prices nudging higher amid ongoing evidence of recovery in global demand, mostly good news on the Covid-19 trends and anticipation of a nearly 2 trillion US stimulus designed to get people working again quickly.

The sharp rise in global oil prices before OPEC+’s March meeting means the calculus for the OPEC+ alliance becomes more complicated.

But with Saudi Arabia seemingly comfortable with oil above Brent above $60, they are unlikely to upset the apple cart.

With production constrained, inventories are drawing and vaccines promising a return towards normalcy at the end of the day, expectations continue to run high for oil markets.

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi