The Market Today
March Data Looking Increasingly Stronger Than February
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Treasury’s Yellen Says Recent Stimulus Will Ease “Deep Pockets of Pain”: Alongside Fed Chair Powell, Treasury Secretary Yellen told the House Financial Services Committee that “deep pockets of pain” and “a huge problem of joblessness” still exist, despite some pick-up in the pace of recovery. “With the passage of the rescue plan, I am confident that people will reach the other side of this pandemic with the foundations of their lives intact,” Yellen said. Discussing reports of a possible $3 trillion “Build Back Better” plan, Yellen said any package would most likely include some “revenue raisers,” including an upward adjustment of the corporate tax rate from 21% to 28%.
U.S. Pandemic Getting Better: White House Medical Adviser Fauci pointed out that cases have “plateaued a bit” which means we should be “cautious” to not “completely turn off all public health measures” as vaccinations continue. He said rising vaccinations will “be a real game-changer.” A top White House COVID-19 adviser said the U.S. will supply a record 27 million vaccine doses this week. Based on government announcements Tuesday, all adults living in Georgia will become eligible for a vaccine on March 25 while all adults in Oklahoma or Texas will qualify for a shot starting March 29.
EU Pandemic Getting Worse: The EU announced that it will strengthen restrictions on vaccine exports. France reported an increase in ICU occupancy from 89.9% to 91.6% on Tuesday. Greece reported its largest daily increase in new infections. Norway tightened restrictions to stem its rising caseload, the Netherlands extended its lockdown until April 20, and Poland plans to announce new measures on Thursday.
24 HOURS OF MARKET ACTIVITY
Risk Assets Declined to Push 10-year Treasury Yield Down Sharply: Equities’ overnight weakness intensified during U.S. trading on Tuesday, helping to drive and taking no solace from a steady decline in longer U.S. Treasury yields. The Nasdaq led losses with a 1.1% decline while the S&P 500 slipped 0.8%. Cyclicals, including energy companies, led most S&P 500 sectors lower with only the most defensive names notching gains. Crude prices dove further during U.S. hours, pushing U.S. WTI below $58 per barrel for the first time since early February. As risk assets retreated, Treasury yields pushed further from last week’s new pandemic highs. The 10-year yield ended 7.4 bps lower at 1.62%, near its daily low. The 2-year yield was little changed after a solid $60 billion auction.
U.S. Assets Show Positive Divergence as Global Markets Continue to Retreat: At 7 a.m. CT Wednesday, Treasury yields were essentially unchanged across the curve while U.S. equity futures had flipped higher despite a drag from foreign markets. Stocks in Asia were broadly weaker and Europe’s Stoxx 600 had declined 0.2%, disregarding a surprisingly solid indication of economic activity in early March. On the back of much stronger manufacturing and services PMI readings in both France and Germany, the Eurozone’s composite PMI jumped from 48.8 to 52.5, beating estimates of 49.1 and registering the first expansionary reading since September. Manufacturing expanded at the fastest rate on record while services continued to contract, albeit at a notably slower rate. The good news, however, is expected to be short-lived considering the ongoing virus wave across Europe amid a slow vaccine rollout that has prompted many countries to extend restrictions on activity in recent weeks.
New Home Sales Sink More Than Expected: Sales of new homes sank 18.2% in February, the second-largest drop since 2010 behind July 2013, to 775k annualized units, the weakest pace since May. The decline was larger than all but two of the estimates provided by the 60 economists polled by Bloomberg. While weather likely had an effect, all four regions experienced a double-digit decline, led by a 38% drop in the Midwest, implying some non-weather related softening. Still, the prior three months were revised up 77k in total, partially offsetting the 95k-unit miss in February, and sales remained positive on a year-over-year basis.
Powell Sings from the Same Post-Meeting Songbook: Fed Chair Powell stuck close to last week’s post-meeting press conference script, saying “inflation will move up over the course of this year,” but adding that “Our best view is that the effect…will be neither particularly large nor persistent.” He said the higher prints later this year will be the result of base effects and supply chain issues that could be exacerbated by the release of pent-up demand as more of the economy reopens. “We have been living in a world of strong disinflationary pressures…for a quarter of a century,” he said, and “We don’t think a one-time surge in spending leading to temporary price increases would disrupt that.”
Brainard Says Fed Must “Stay the Course” with “Resolute Patience”: Fed Governor Brainard echoed Chair Powell’s belief that strong, global disinflationary forces that pre-existed the pandemic will keep inflation pressures modest after a temporary increase this year. She noted activity has picked up but said the Fed must “stay the course” with “resolute patience” considering the distance that remains between the central bank and its twin goals.
Kaplan Claims One of Four 2022 Hikes in the Dot Plot: Dallas Fed President Kaplan expects inflation to “surge” this year, possibly as high as 2.5%, before slowing later and into 2022. Nonetheless, he claimed one of the dots in last week’s updated projections that called for a rate increase in 2022, while cautioning that he needs “to see outcomes, not just strong forecasts.” He said the economic outlook has improved markedly and should result in 6% growth this year and a decline in unemployment to 4%. He expects the 10-year Treasury yield to head back into a range between 1.75% and 2.00%, calling it a “healthy signal” and a move he would not “advocate in getting in the way of.”
Durable Goods Orders Add to Disappointing February Data, Less Evidence of Weather Effects: Durable goods orders disappointed expectations significantly in February, continuing a recent run of weak February reports. While some results have appeared to be the outworking of a snowy month, there is less conviction of this as it relates to the durable goods report. Headline orders fell 1.1% while orders excluding transportation items fell 0.9%. With only a few exceptions, most categories were notably weak. Leading the weakness was an 8.7% decline in orders for motor vehicles and parts. Relating to business investment in equipment, core capital goods orders fell 0.8% while shipments fell 1.0%. This is the first month in ten for orders and shipments to decline.
Mortgage Rates Continue Higher: Mortgage applications for the week ending March 19 fell 2.5% as refi apps dropped another 4.2%. Mortgage rates continued to trend higher, with the 30-year rate up another 8 bps to 3.36%. Purchase apps, however, did increase another 2.6%.
Markit PMIs: At 8:45 a.m. CT, the Markit manufacturing, services, and composite PMIs for the month of March are expected to improve slightly.
More Fedspeak: Fed Chair Powell and Treasury Secretary Yellen will be on the tape again this morning, speaking before a Senate banking panel on the CARES Act (9:00 a.m. CT). Also speaking today will be influential New York Bank President Williams (12:35 p.m.), Richmond’s Barkin (7:50 a.m.), San Francisco’s Daly (2:00 p.m.), and Chicago’s Evans (6:00 p.m.).