The Market Today
House to Begin Debate on Revised Stimulus Plan; Treasury Auction to Test Market’s Mettle
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Divergent Recoveries: Most of Monday’s news flow was focused on the Senate’s weekend agreement for roughly $1.9 trillion in new stimulus. However, there continued to be signs of divergent recoveries in the U.S. and Europe. While many U.S. states have announced plans to begin lifting business restrictions since Texas and Mississippi removed their mask mandates and pared back virus measures last week, the Netherlands became the latest European country to extend lockdown measures, with the Dutch prime minister saying current measures would last through at least the end of March. The recent economic data have shown the U.S. recovery taking strides forward while Europe’s has faltered.
On the vaccines: U.K. Prime Minister Johnson announced Monday that a third of all citizens had been vaccinated. In the U.S., Florida’s governor said anyone 60 years old or older could get a shot starting next week. The CDC announced new guidance for those who have already received a full vaccination, approving small indoor gatherings without masks or distancing. Masking and distancing while in public was still recommended.
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Rates and Cyclicals Continue to Climb Amid Reopening Optimism, as Tech’s Losses Pile Up: Despite a solid day of gains for most cyclical sectors, the S&P 500 fell 0.5% as tech shares posted steep declines with Treasury yields extending last week’s late-week climb. Financials, materials, and industrial all rose more than 1% on Monday but were more than offset by a 2.5% decline in technology and even sharper declines in related names such as Facebook, Google, and Twitter. The Nasdaq fell 2.4%, pushing the index into a technical correction with a more-than-10% decline from its February 12 record high, while the Dow rose 1.0%. The tech-related names, which led stocks’ record run during the pandemic, have turned back amid a growing optimism about economic reopening which has lifted Treasury yields in recent days. A climb that began last Wednesday persisted Monday, sending the 5-year yield up 5.5 bps to 0.85% and the 10-year yield 2.5 bps higher to 1.59%, both new high closes since February 2020. A key factor behind expectations the recovery will soon gain a new head of steam took another step closer to becoming a reality over the weekend. The Senate passed its version of a $1.9 trillion stimulus bill on Saturday that the House is expected to approve this week and pass on to President Biden to sign.
Tech Stocks Recover as Treasury Yields Pull Back: The negative correlation between Treasury yields and tech stocks remained the focus overnight. Nasdaq futures recovered sharply, up around 2% from Monday’s close, as the 10-year Treasury yield tumbled from above 1.59% to below 1.54% at 7 a.m. CT, leading a broader pullback in major global sovereign yields. While tech has led futures higher ahead of Tuesday’s U.S. session, the stronger sentiment appeared supportive of most sectors, lifting the S&P 500 up 0.9% and the Dow by 0.4%. Investors bet more stimulus will buttress the U.S. recovery as the pandemic withers, a recovery that is clearly outpacing the trend in Europe. Data overnight showed German exports rose 1.4% unexpectedly while imports declined by a more-than-estimated 4.7%. A separate report revised the Eurozone’s 4Q20 annualized economic contraction down from -2.4% to -2.8%, compared with a 4.1% quarterly expansion for the U.S. economy.
Fed 13(3) Facilities: The Fed announced Monday that it was extending its Paycheck Protection Program Liquidity Facility (PPPLF) through June but would allow facilities established early in the pandemic to support commercial paper, money markets, and primary dealers, which “have not had significant usage since last summer,” to expire at the end of this month as previously scheduled.
Yellen Yawns at Inflation Risks, Says Infrastructure on Deck: Treasury Secretary Yellen said Monday she hopes the labor market will fully recover sometime next year thanks in large part to the administration’s $1.9 trillion stimulus bill. She isn’t concerned about inflation running too hot, noting that U.S. policymakers have sufficient tools to deal with faster inflation. After the House passes and the president signs the American Rescue Plan, expected to occur this week, she said the focus will shift to a plan to “build back better,” which is expected to be heavily focused on infrastructure spending.
Small business confidence improved in February, but not as much as expected. Confidence increased from 95.0 to 95.8. The percentage of respondents saying they could not fill job openings rose from 33% to 40%. The net number of respondents who expect business conditions to improve over the next six months remained negative, improving 4 points to -19%. Those expecting higher sales continues to fall, with the net number of respondents down another 2 points to -8%. The NFIB’s Chief Economist, Bill Dunkelberg, said in the report, “Small business owners worked hard in February to overcome unexpected weather conditions along with the ongoing COVID-19 pandemic. … The economic recovery remains uneven for small businesses, especially those still managing state and local regulations and restrictions.”
Stimulus Bill Revisions and Treasury Auction: The House will begin debate on the Senate-revised stimulus bill later today. Treasury will auction $58 billion in 3-year notes this afternoon, the first auction since the disappointing results on the 7-year auction sent yields shooting higher two weeks ago.