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US yields nudged slightly higher overnight after the Beige Book gave rise to the tug of war between inflation and growth.

The report suggested that businesses were raising bottom line prices between February and April, which signalled that firms feel comfortable passing the higher input cost on to consumers amid a rapidly improving US labour market.

With US yields basing and rising ever so slightly, extremely rates finicky long-duration Tech assets sold off. This pattern has become a typical ‘two steps forward and one step back routine’ for tech shares as US rates ebb and then start to flow higher again.

The extent to which bond markets experience any hint of inflation tantrum that elicits much higher yields depends mainly on corporate pricing power, US Fed credibility and energy prices.

Today’s US retail sales print is now increasingly important. With forecasts for 7.2% in the control group, and while it does seem the talk on the street is more about downside risk to that number than upside, so on a data beat, will retail sale be the “rock the bond boat” type of number that the market might think could push the Fed along the string?

Probably not as for now, at least at the core of the FOMC, the hurdle for more hawkish communication is pretty high, particularly for the April 27-28 meeting, but beyond then, holding onto downside risks will prove more difficult as incoming data improve.

Oil price surges

Oil surged on news of a large draw in products stocks. In the last week, crude stocks dropped 5.9 million barrels against forecasts for a 2.9 million draw. Distillate stocks down 2.1 million vs predictions for one million build. And the weaker US dollar confirmed oil trading is open for business again. A truly bullish oil report from the US, according to the headline numbers.

Indeed, this speaks volumes about the US demand recovery and inventories getting siphoned thanks to OPEC+ supply curtailments.

Like OPEC on Tuesday, the IEA raised its estimate for 2021 demand yesterday. The new number is 96.7mb/d, about 230kb/d higher than the last estimate and a 5.7mb increase vs 2020.

Non-OPEC supply for 2021 is estimated up only 600kb/d vs the previous year, to 63.8mb/d. Risks remain on the omnipresent Covid concerns, but the agencies so far seem constructive on the oil outlook. The proof again starts to show up in pudding with the market improving and inventories declining.

But make no mistake, the world is still dealing with the second variant. And governments are trying to resist lockdown blockades. But complicating matters is the cloud hanging over the Adenoviral vector vaccine. It is worth considering that easy-to-store vaccines such as Astra Zeneca and Johnson & Johnson are critical in the global programme to counter Covid as medical experts continue to examine potential side effects.

As oil prices shift back to the higher end of the perceived comfort zone ($60-70), there will be cries from buyers in Asia and even the US administration to keep a lid on prices as the last thing the global economic recovery needs is higher inflation inputs driving global yields higher.

OPEC+ is cognisant of this viewpoint as Russian Energy Minister Alexander Novak reminded us in early April, “it is now critical neither to overheat nor to undersupply the oil market.”

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