The Market Today
Consumer Prices Jump on Pandemic Volatility; Budget Deficit Jumps to 19.1% of GDP
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
U.S. Vaccination Campaign’s First Stumble: The FDA and CDC issued a joint statement after announcing regulators were recommending pausing use of Johnson & Johnson vaccine doses. The statement read, “As of April 12, more than 6.8 million doses of the Johnson & Johnson (Janssen) vaccine have been administered in the U.S. CDC and FDA are reviewing data involving six reported U.S. cases of a rare and severe type of blood clot in individuals after receiving the J&J vaccine. …All six cases occurred among women between the ages of 18 and 48, and symptoms occurred 6 to 13 days after vaccination. … Until [a deeper review of these six cases] is complete, we are recommending a pause in the use of this vaccine out of an abundance of caution.”
Sundry Virus News: Prior to the news, a White House COVID-19 adviser said Monday Johnson & Johnson still expected to deliver “at or near” its 24-million dose target for April, despite a manufacturing mix-up that led to a delay in production. The company also confirmed Monday it had made its first delivery of doses to the EU and expects to provide 200 million shots in total for 2021. The CDC continued to sound concerned about continued increases in cases and hospitalizations and the WHO said the global pandemic is far from over. Reports indicated that German states had decided to extend restrictions through May 9, though there was no official confirmation.
Consumer Prices Jump on Pandemic Volatility: Consumer prices rose 0.6% at the headline level and 0.3% core in a firmer March result than expected. The results brought headline CPI up from 1.7% to 2.6% YoY and core prices up from 1.3% to 1.6%. Across the report, the trends were mixed with no clear sign of broad inflation pressure except from the service sector. Driving headline inflation was a 5.0% increase in energy prices. Commodity prices excluding energy were up less than 0.1%. The strongest increase in prices came from the services categories which rose 0.43% MoM. Housing inflation was quite firm on a modest increase in owners’ equivalent rent, +0.23% MoM, and a large rebound in lodging away from home prices, +3.8%. Rents appear to be steadying after a run of weak months. In the other large category, medical care, prices were up just 0.1% MoM. Apparel prices fell further, down 0.3% MoM. Transportation prices rose 2.7% on increases in auto rentals (+9.1%) and motor fuel (+11.8%). Excluding motor fuel, transportation prices fell 0.1%. Bottom line: Consumer prices are expected to rise at a faster rate this year coming off the pandemic impact and base effects. The March data shows a mostly uneven recovery in certain categories with no concrete indication of a worrisome acceleration.
Fedspeak: There are six Fed officials on the tape today: Philadelphia’s Harker (11:00 a.m. CT), San Francisco’s Daly (11:00 a.m.), Richmond’s Barkin (11:00 a.m.), Cleveland’s Mester (3:00 p.m.), Atlanta’s Bostic (3:00 p.m.), and Boston’s Rosengren (3:00 p.m.).
Treasury Issuance: Treasury will be auctioning $24 billion in 30-year bonds today.
24 HOURS OF MARKET ACTIVITY
The major U.S. equity indices were never able to turn it around on Monday, ending marginally below last Friday’s record highs. After both eclipsed new all-time highs to end last week, the Dow dipped less than 0.2% while the S&P 500 closed just fractionally below where it opened. While most sectors within the S&P 500 did improve on the day, the heavily weighted tech names and a decline for energy stocks spoiled the day. Despite a slow start to the week, the headlines should pick up as key economic data is released, Fed officials discuss their outlooks, and the corporate earnings season begins. Treasury yields rose on the day but closed below their highest levels. The 5-year yield led with a 1.8-bp gain to 0.88% while the 2-year yield added 1.2 bps to 0.17%. The 10-year yield rose 0.7 bps to 1.67% and showed no signs of being affected by an uneventful auction around lunch.
U.S. equity futures, which had been relatively quiet for most of the overnight session on Tuesday, abruptly turned lower after news broke that the FDA was recommending pausing use of the Johnson & Johnson vaccine (more above) as they, alongside the CDC, investigate six cases of “a rare and severe type of blood clot.” Dow futures swiftly erased their 0.1% gain to fall to down 0.3% for the day. The 10-year Treasury yield also briefly erased its overnight rise but quickly recovered. The benchmark yield was up 1.3 bps to 1.68% before the CPI report was released. After jumping immediately to up 2.7 bps on the day following the firmer-than-expected inflation figures, the 10-year Treasury yield pulled back to near unchanged.
Federal Deficit Soars to New Record on Stimulus Disbursements from the American Rescue Plan: The monthly budget deficit widened sharply in March as stimulus disbursements related to the American Rescue Plan began. The federal deficit jumped from $119.1 billion a year ago ($310.9 billion in February) to $659.6 billion in March, nearly matching economists’ expectations and marking the third-largest monthly deficit in history behind April and June of last year. Monthly revenues rose from $248 billion in February to $267 billion but were overwhelmed by a $368-billion increase in expenditures to $927 billion. Income security payments, which include the $1,400 direct checks to many Americans, accounted for the lion’s share of the jump, rising from $122 billion to $453 billion. The 12-month deficit surged from $3.55 trillion to $4.09 trillion, or from 16.5% to 19.1% of GDP, representing a new all-time high.
Boston Fed President Rosengren said he expects an “unusually strong post-recession recovery” this year but cautioned that a complete return to a pre-pandemic economy is likely to take longer than most are anticipating. He continues to believe the Fed’s current accommodation is appropriate in the current economic environment. He doesn’t expect they will be needed but stressed that the Fed has potent tools to tamp down inflation if it moves up too far. He also noted he is comfortable with inflation being above 2% for a while.
St. Louis Fed President Bullard said, “I do think we’ll get more inflation this year,” but said that any signal from the next few reports will be clouded by base effects. Accurately gauging price trends should become a bit easier in the second half of this year but, he said, the Fed will be less preemptive in responding to changes in inflation. “It’s too early” to discuss tapering asset purchases but “if we get to the end of the [pandemic] tunnel, it will be time to start assessing where we want to go next.” “When you start to get to 75% vaccinated, 80% vaccinated and CDC starts to give more hopeful messages…and starts relaxing some of their guidelines, then I think the whole economy will gain confidence from that,” he said.
New York Fed Survey Shows Consumers Expect Activity and Inflation to Pick-Up: A survey of U.S. consumers published by the New York Fed showed Americans anticipate prices to move up amid stronger economic activity. Expectations for income growth hit a new high since prior to the pandemic while the outlook for spending gains rose to its highest level since 2014. Consumers’ expectations for near-term inflation also edged up to a high since 2014, with expected increases in home prices, rent, and gasoline all touching survey highs.
Small Business Confidence Improves but Find Labor Proving Difficult: Small business confidence improved 2.4 points to 98.2 in March on a broadly better outlook for the economy. The economic outlook index rose 11 points while the expectations for higher sales index rose 8 points. According to the NFIB Chief Economist, Bill Dunkelberg, “Main Street is doing better as state and local restrictions are eased, but finding qualified labor is a critical issue for small businesses nationwide. … Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force.”