The Market Today
Fed Decision Day with Focus on Forecast and Dot Revisions
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Europe Awaits EMA’s Review of AstraZeneca Shot: Most of Tuesday’s vaccine-related headlines remained focused on the suspension of the AstraZeneca vaccine in most European countries at a time when the continent faces a rising trend for new infections. The European Medicines Agency (EMA), the health regulatory body responsible for approving vaccines for use in Europe, said again that the benefits of the AstraZeneca shot outweigh the risks and showed concern that public trust in vaccines could be damaged. Presidents from Italy and France said they would resume vaccinations with the shot after the EMA finishes its review and signs-off again on its safety.
24 HOURS OF MARKET ACTIVITY
A morning sell-off in Treasurys that had pushed the 10-year yield higher was briefly interrupted by a solid 20-year note auction. The noon auction stopped through on a higher bid-to-cover than at the last auction and reflected increased interest from non-primary dealer purchasers. However, the move up in yield resumed shortly thereafter, nudging the major equity indices back into negative territory. Stocks had opened stronger despite sizeable misses for retail sales and industrial production, with investors passing on drawing any conclusions about the recovery due to the impact severe winter weather had on both February reports. Adding to the willingness to dismiss was last week’s stimulus package that is set to unleash more stimulus into the economy in the weeks ahead. When the dust settled, the S&P 500 and Dow had registered small declines from Monday’s record highs while the Nasdaq inched less than 0.1% higher. The 10-year Treasury yield rose 1.2 bps to 1.618% while the 2-year yield dipped 0.2 bps to 0.149%.
Consistent with the Thursday trend for other global sovereigns, longer Treasury yields continued to push higher overnight as investors await this afternoon’s Fed decision. The 10-year yield was up 4.8 bps just before 7 a.m. CT to 1.67%, its highest level since January 24, 2020. The 2-year yield’s smaller 0.6-bp increase left the curve 4.5 bps steeper at 151 bps, the steepest 2-year 10-year slope since August 2015. Not surprisingly considering recent trading patterns, the rise in rates applied some downward pressure on equity futures. Against a backdrop of generally weaker global equities, Nasdaq futures were off by more than 1% and S&P 500 contracts had slipped nearly 0.4%.
Winter Weather Weighed Heavily on Industrial Output in February: Industrial production and manufacturing output were both surprisingly weak in February. Industrial production slumped 2.2% and manufacturing output contracted 3.1% compared with expectations for gains of 0.3% and 0.2%, respectively. The Federal Reserve, however, blamed “the bulk of the declines in output” on severe winter weather that shut down activity for at least several days across a huge swath of the country. “Most notably, some petroleum refineries, petrochemical facilities, and plastic resin plants suffered damage from the deep freeze and were offline for the rest of the month,” the Fed’s report said. They estimated that, “Excluding the effects of the winter weather would have resulted in an index for manufacturing that fell about 1/2 percent.”
NAHB Said Higher Costs Hurt Current Builder Confidence: The NAHB’s Housing Market Index fell unexpectedly in March from 84 to 82, disappointing expectations for no change. The monthly decline left the headline index at its lowest level since August, but still well above February 2020’s pre-pandemic reading of 74. The monthly decline was driven entirely by a softer assessment of current sales that offset a small gain for expected activity six months from now and steady foot traffic of potential buyers. The NAHB’s Chairman said, “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment.”
Purchase Apps Continue to Recover but Mortgage Rates Grind Higher: Mortgage applications for the week ending March 12 fell 2.2% as a 4.2% drop in refi apps outpaced a 1.8% increase in purchase apps. Mortgage rates continued their grind higher, up another 2 bps to 3.28% (30Y fixed).
Housing Starts and Permits Slow on Snow: Housing starts fell 10.3% in February while building permits sank 10.8%, giving further evidence to the effects of snow across much of the U.S. in February. Starts fell 39.5% in the Northeast, 34.9% in the Midwest, and 9.7% in the South. The region with the least unusual weather relative to its seasonal norms, the West, saw starts jump 17.6%. The weakness was evenly spread across single and multi-family activity. Similar trends were seen in the building permits data.
FOMC Day – Focus on Growth, Inflation, and Dots: The Fed will conclude its two-day meeting today with an Official Statement, Summary of Economic Projections, and Implementation Note released at 1:00 p.m. CT. Fed Chair Powell will host his presser at 1:30 p.m. Expectations are for no changes to policy but almost requisite will be changes to their communications via their economic forecasts. Officials are sure to revise higher their growth projections given the additional, larger-than-expected stimulus passed last week. Key will be how the revised growth projections affect their inflation forecasts. Primary attention will be on the infamous dot plot to see any evidence of policymakers changing their views on how long they can hold the overnight rate at zero.