The Market Today
Longer Treasury Yields Spike to Pandemic Highs; Seasonality Distorts Strong January Retail Sales
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Tracking the Path to More Stimulus: As Democrats continue to work on another aid package, President Biden said last night in a televised town hall that “We can’t spend too much — now’s the time we should be spending, now’s the time to go big, … The vast majority of the serious people say bigger is better now, not spending less.” HUD announced earlier on Tuesday that it was extending eviction moratoriums on FHA and USDA loans through the end of June.
Monitoring Vaccines: On the vaccine front, the White House said it expects weekly shipments of vaccines to states to move up from 11 million to 13.5 million next week and pharmacies to get twice as many jabs as they are currently receiving. A CDC advisory committee was reportedly pondering the idea of lengthening second-dose windows to allow more individuals to receive their first shot. Politico reported that the White House had met with officials from Amazon to discuss vaccine logistics and Johnson & Johnson said it had applied for emergency use of its vaccine in Europe.
24 HOURS OF MARKET ACTIVITY
Equities Closed Mixed Tuesday with Dow the Lone Gainer to a Record: Treasury yields were the focus throughout Tuesday’s U.S. session as stocks faded early gains to end mixed and little changed. The S&P 500 jumped as much as 0.4% in the first couple of hours before drifting lower and then sideways, ending essentially flat. Most sectors declined, while oil and financials jumped, benefitting from one-year highs for crude prices and longer Treasury yields. Rate-sensitive sectors such as real estate, utilities, automakers and homebuilders led declines. The Nasdaq declined 0.3% while the Dow added 0.2% to a new record. Global equities and U.S. futures remain frozen ahead of Wednesday’s important U.S. economic events as investors continue to digest the sharpest jump and highest level for longer Treasury yields since the pandemic began.
Continuing Last Week’s Push Higher on Stimulus Prospects, Treasury Yields Spike Outside Top End of Pandemic Range: The lack of excitement in equities Tuesday kept investors’ attention on that sharp yield increase which steepened the Treasury curve and pushed the 10-year note into a technical air pocket. The absence of an obvious catalyst indicated the 10.6-bp increase, which matched the biggest single-day increase since March 2020, was a carryover of momentum from last week driven by Democrats’ push for additional stimulus. The jump to 1.314% broke through March’s pandemic intraday high of 1.27% and left the benchmark yield up 30 bps from where it closed after the Fed’s January 27 meeting and 40 bps higher than where it ended 2020. Prior to this morning’s retail sales report, the 10-year yield had only given back 0.8 bps of yesterday’s jump and was holding above 1.30%. Following a spike higher on the surprising retail sales figures, the 10-year yield quickly settled back near unchanged for the day.
Fed’s George Sees Risks for Commercial Real Estate, Not Concerned About Rise in Long-Term Yields: Kansas City Fed President George repeated a Fed-favorite description of the recovery, saying it has exceeded expectations broadly but seen certain sectors lag well behind or be left out entirely. She is concerned that adaptations during the pandemic, such as working remotely, could quicken structural changes that may cause lasting damage to commercial real estate. Addressing the market’s current focus, “To the extent economic optimism is behind rising long-term bond yields, it is consistent with the Fed’s policy,” and “not concerning” or a reflection of “tightened financial conditions.”
Fed’s Bowman Stresses Powell’s Pledge for Patient Accommodation: Fed Governor Bowman, who leads community banking efforts at the Fed, echoed Chair Powell’s messaging from last week that the labor market and broader economy both have a long way to go to fully heal from the blows dealt them by the pandemic. As a result, she also stressed his point that policy will remain accommodative until officials are comfortable the Fed’s goals will be achieved on a sustainable basis, which many expect could take years.
Fed’s Daly Dismisses Inflation Risk: San Francisco Fed President Daly, who votes on policy decisions this year, talked down what has become a popular topic of debate and growing concern for some investors. While market-based inflation expectations have rocketed higher this year – 5-year TIPS-implied inflation rose 1.7 bps to 2.39% Tuesday, the highest level in nearly eight years – Daly said, “We should be less fearful about inflation around the corner and recognize that fear costs millions of jobs.” She added, “I don’t think that’s a risk we should think about right now.”
Seasonal Patterns Distort Sales Data, But Positive Results in January: The January retail sales data show stronger spending in January than expected, particularly when compared with December’s level of spending. On a month-over-month basis, sales rose a seasonally adjusted 5.3% in January, well above expectations for a 1.1% increase. However, the actual level of non-seasonally adjusted sales fell 17.3% from December. Because sales typically fall near 21% from December to January, this year’s January report looks better, and the seasonal adjustment turns it into a positive result. Knowing that the headline results have been exacerbated by the seasonal adjustment, it is difficult to make much of the sector results. Every sector saw positive results but electronics and appliances lead the way rising 14.7% MoM.
Firmer Producer Prices will Fuel Further Inflation Debate: Headline producer prices rose 1.3% in January compared with December while core prices rose 1.2%, easily topping respective expectations for smaller gains of 0.4% and 0.2%, representing the strongest monthly readings since a shift to the current calculation methodology in 2013. The current month’s strength lifted the headline annual rate from 0.8% to 1.7% and the core rate from 1.1% to 2.0%, both marking the strongest levels of the pandemic. While energy prices were responsible for a portion of the headline measure’s gain, the firmness was evident across almost every category and could further fuel the debate about inflation in the U.S.
Busy Day for Data, Including FOMC Minutes: At 8:15 a.m. CT, the January Industrial Production report is expected to show manufacturing output regain another 0.7%. At 9:00 a.m., the December Business Inventories data is expected to show the inventory rebuild continue. Also at 9:00 a.m., the February Homebuilder Confidence is expected to hold steady at a strong level. Later, the Fed will release its January FOMC Meeting Minutes at 1:00 p.m.