Judgingby movements in various asset classes on Monday, investor faith that the globaleconomy has entered a new business cycle has strengthened. Commodity markets remainin ascendant mode and oil, in line with ourexpectations , has risen again. The Bloomberg commodity index, which is agood proxy for commodity inflation in the global economy, has updated its localhigh as well. YoY rally is more than 50%, which has rarely happened in thehistory of the index:

Stockindices are also looking for new highs, interestingly, Asian shares are risingfaster, which correlates with success in containing the virus, as well asimproved production and export figures of Asian economies, which is what theexpansion rests on. Q4 Asian GDP data beat expectations, further indicatingthat the recession in 2020 was not as strong as the markets expected.

Thereare also pronounced risk-on moves in the fixed-income, especially US Treasurymarket. 10-year T-Notes yield which is more sensitive to changes in inflationexpectations than its shorter maturity counterpart, has risen to 1.21%. Therally in yields accelerated notably on Friday when House Speaker Nancy Pelosiprovided more details about timing of the new fiscal spending package:

Recallthat longer-maturity bonds are more vulnerable to changes in inflation orcentral bank interest rates, because their cash flow is "stretched"in time. Since the Fed pledged to keep rates low for a relatively long time(1-2 years), the bond yield is likely rising (or the value of the bond falls), dueto the second factor - expectations of accelerating inflation. Recall also thatrising inflation erodes purchasing power of future cash flows, hence negativeresponse of bond prices to inflation threats.

Thespread with two-year Treasuries has already risen to 1.10%, the highest sinceApril 2017. Typically, this spread grows when there is a consensus in themarket that the economy growth rate will accelerate in the near future.

Themain events in the economic calendar for this week are scheduled for Wednesday,when the data on retail sales in the United States for January and the minutesof the Fed meeting appear. The dollar may hold up well until Wednesday, butchances are good that the Minutes will again indicate the Fed's readiness tokeep rates at zero for a long time, without the slightest hint of anormalization of policy. This is definitely USD bearish event. In addition, let’skeep in mind that the Fed is implementing a new concept of inflation targeting,which does not provide for an early response to accelerated price increases, asit was before. Here, too, the dollar may face a bearish surprise, as the signsof rising inflation pressure may find little response from the Fed. Retail salesare expected to grow by 1% in January, but there are risks of a positivedeviation, since in January US households received another portion of stimmychecks from the government, so sales growth may be stronger, which isdefinitely a risk-on outcome. We may see USD going into defensive in the secondhalf of the week due to potentially bearish outcomes of these two events and atest 90 points on DXY seems likely:

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