The Market Today
Europe’s Covid Surge Roils Markets
by Craig Dismuke, Dudley Carter
Europe’s Recent Virus Surge Leads to New Restrictions: For several weeks, caseloads in many European countries have risen rapidly and several recently saw daily infection levels climb to new highs for the pandemic. Austria announced a new national lockdown on Friday and said it will require citizens be vaccinated beginning February 1, although the details of enforcement are still being discussed. Top health officials in Germany said a lockdown can’t be taken off the table as an option as the “the whole of Germany is one big outbreak.” Chancellor Merkel said Germany is in the midst of a “dramatic situation.”
A Couple More Fed Officials Wrap up a Busy Week: There are no economic reports on the calendar today. Fed Board Governor Waller will speak at 9:45 a.m. CT. Vice Chair Clarida, who is expected to be replaced at the conclusion of his term in January, is speaking at 11:15 a.m.
OTHER ECONOMIC NEWS
Fed’s Williams Sees Broader Inflation; Watching Inflation Expectations: New York Fed President Williams said the U.S. economy is “roaring back” and acknowledged that underlying inflation is picking up and broadening out. Short- and medium-term inflation expectations have risen and “long-run inflation expectations…[have] moved up quite a bit.” “You wouldn’t want those long-run inflation expectations to move significantly further up,” Williams added. Citing a common reason for why officials expect inflation to moderate, Williams noted the underlying fundamentals of the economy are still the same as they were prior to the pandemic, when inflation was near the Fed’s 2% target.
Fed’s Evans is Keeping an Open Mind on Policy: Chicago Fed President Evans signaled he’s keeping an open mind about the policy outlook. “I still think that the relative price increases coming from supply shocks will be diminishing, and…the inflation data by the end of 2022 is going to be a lot closer to 2% than so many people think,” Evans said. However, “it could well be the case that this goes on longer than I’m expecting, with a configuration of price changes which is more troubling in terms of persistence.” As a result, rate hikes could begin “next year after we finish our asset-purchasing program, or it could be as long as into 2023.” Evans said it’s likely to “take several months into the spring” to gauge the trajectory of supply-chain disruptions.
CBO Scores BBB as Increasing the Deficit: The CBO released its scoring of President Biden and House Democrats‘ social and climate spending bill Thursday afternoon. The WSJ reported that, “CBO found that the bill will contribute $367 billion to the deficit over 10 years, … For technical reasons, CBO’s bottom line doesn’t include $207 billion in revenue that the scorekeeper estimates would result from pouring roughly $80 billion into tax enforcement efforts at the Internal Revenue Service. Adding that revenue to CBO’s other estimates would make the bill’s 10-year deficit about $160 billion. The Biden administration says its IRS spending would generate $480 billion, not $207 billion; in their view, that would tip the bill over to reducing the deficit, and many Democrats appear willing to accept that perspective.” While the bill may quickly pass in the House, it’s expected to receive no support from Senate Republicans and some Senate Democrats have proposed changes to certain aspects of the House bill.
Ford, GM Taking Steps to Protect Against Future Chip Woes: The global supply chain remains under a microscope for any signs that bottlenecks are beginning to ease. The auto sector has been the poster child of how supply disruptions during the pandemic have significantly impacted activity. Ford and GM both announced Thursday steps to shore up their current and future chip supply. The WSJ summarized those statements, writing, “Ford on Thursday morning outlined a strategic agreement with U.S.-based semiconductor manufacturer GlobalFoundries Inc. to develop chips, a pact that could eventually lead to joint U.S. production. GM later said it was forging ties with some of the biggest names in semiconductors – including Qualcomm Inc. and NXP Semiconductors NV – and has agreements in place to co-develop and manufacture computer chips.“
Stocks Back at Records Thursday: The S&P 500 rose Thursday after recovering from a brief morning sell-off while Treasury yields ended little changed. The major indexes opened higher despite broad weakness across Asia and Europe before dropping sharply just after 9 a.m. CT. Almost simultaneously about that time, New York Fed President Williams expressed some anxiousness about inflation (more above) and a report said Senator Manchin remained undecided about supporting President Biden’s Build Back Better plan. The S&P 500 ultimately recovered, however, notching a 0.3% gain and nabbing its first record finish since November 8 (as did the Nasdaq). Retail, auto, and technology stocks cushioned the index from declines in most other sectors. Before the opening bell, Kohl’s and Macy’s posted stronger-than-expected quarterly results, lengthening the list of U.S. retailers that have topped analysts’ expectations this week and sounded upbeat about holiday shopping. Treasury yields had risen early after another solid jobless claims report and better-than-expected update on manufacturing activity in the Philadelphia Fed District but pulled back as equities retreated. Despite the quick resurgence for equities, yields finished mostly lower for the day. The 2-year yield edged up 0.2 bps to 0.50%, the 5-year yield fell 1.1 bps to 1.22%, and the 10-year yield slipped 0.3 bps to 1.59%.
Europe’s Virus Situation Sparks Ripping Risk-Off Rally into Sovereign Bonds: Treasury yields have tumbled Friday as the market news cycle has been overtaken by Europe’s virus surge which is pushing some countries there to reimpose restrictions (more above). With the economic effects of such restrictive measures still fresh in minds, Europe’s Stoxx 600 fell quickly from a session-best gain of 0.4% to a session low of -0.5% at 7 a.m. CT. Energy companies led declines as oil retreated with consumer services and airlines adding to the selling pressure. Yields across the region tumbled more than 6 bps on 10-year securities and between 2 and 4 bps for shorter maturities. The Euro slid to its weakest level against the Dollar since July 2020. U.S. Treasury yields have followed suit, pushing the 2-year yield down 5.2 bps to 0.45% at 7:10 a.m. CT, the 5-year yield down 6.9 bps to 1.15%, and the 10-year yield 5.8 bps lower to 1.53%; all marked the lowest levels since a surge following last Wednesday’s hot CPI report. S&P 500 futures were down 0.3%.