The Market Today

Markets Focused on Powell

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Stimulus Outside of the U.S.: Canada followed the U.K.’s lead from earlier in the day, announcing the extension of some key support measures later into the year. The U.K. government said it will need to get spending, deficits, and the debt under control on the other side of the pandemic and expects to increase taxes on higher earners and larger businesses.

Virus Restrictions: Daily vaccinations rose above 2 million for the first time. The White House said the President will discuss with Texas’s governor his decision to get rid of the state’s mask mandate and remove most restrictions. New York announced that domestic travelers will no longer be required to quarantine and that large venues will be allowed to reopen at 33% capacity from April 22. Larger outdoor gatherings will be allowed in New York from March 22.


Stocks Slid Wednesday as Treasury Yields Rose Again: Despite a sizeable jump for global sovereign yields in overnight trading, equity futures strengthened alongside gains in Asia and Europe ahead of Wednesday’s U.S. session. The major indices, however, opened weaker after the disappointing ADP report and took another leg lower following the broadly weaker ISM Services survey (more below). Gradually declining for the remainder of the session, the S&P 500 ended down 1.3% at its daily low. Some cyclical sectors improved but were overpowered by a more-than-2% drop in tech-related names. The Nasdaq was the worst performer, sliding 2.7% to its lowest level since January 6. Although this week’s moves have appeared more orderly, higher rates continued to apply pressure to equity indices. Despite the weaker economic data and downturn for equities, the Treasury curve ended the day higher and steeper. The 2-year yield rose 2.0 bps to 0.14%, the highest since mid-January excluding last Thursday’s spike, while the 10-year yield added 8.8 bps to 1.48%, its second highest close since February 20, 2020.

Yesterday’s U.S. Equity Weakness Becomes World’s Thursday Affliction: The weakness that beleaguered U.S. stock indices yesterday has made its way around the globe on Thursday, with the 10-year U.S. Treasury yield climbing as high as 1.49% early in overnight trading. The MSCI Asia Pacific index slumped 1.8% and Europe’s Stoxx 600 had dipped 0.5% midway through trading. Highlighting again the divergent recoveries in the U.S. and Europe as a result of different government approaches to the winter wave of the virus, retail sales in the Eurozone sank 5.9% in January, a sizeable miss relative to the 1.4% decline expected and notably weaker than a 5.3% surge in U.S. retail sales to start 2021. U.S. equity futures were around 0.2% lower ahead of the jobless claims update, even as Treasury yields receded from earlier highs. The 10-year yield, which was down 1.4 bps to 1.47% before the report, was back close to unchanged for the day following the unexcitingly steady unemployment filings.


ISM Services Index Disappoints with Unexpected Slowdown: The ISM Services Index, expected to be flat in February at 58.7, instead dropped to a nine-month low of 55.3. The largest drag came from a 9.9-point slide in new orders to 51.9 while current activity dipped 4.4 points to 55.5, both lows since last May. Employment cooled 2.5 points but held at its second highest level of the pandemic. Slower supplier deliveries prevented the index from shedding an additional 0.8 points. While it didn’t impact the headline, prices paid jumped to the highest level since 2008 and was cited multiple times in the comments as a cross-sectoral concern. While expectations are for the recovery to gain steam this year, also a common sentiment in the comments, the February data shows the positive momentum has yet to pick up.

Beige Book Describes Modest Growth, Moderate Inflation, Slow Job Gains: The Federal Reserve said economic activity “expanded modestly” in the weeks leading up to mid-February, indicating no significant change from the underlying dynamics behind the uneven recovery, and that “employment levels rose over the reporting period, albeit slowly.” It also noted that “most businesses remain optimistic regarding the next 6-12 months as COVID-19 vaccines become more widely distributed.” Of interest, “nonlabor input costs rose moderately” with “the rise in costs…widely attributed to supply chain disruptions and to strong overall demand.”

Harker Expects Strong 2H21, Accommodative Policy to Continue: Philadelphia Fed President Harker said growth in the second half of the year could be as strong as 5% to 6% but doesn’t expect inflation to be quickly sustained above 2%. However, he conjectured about what an eventual moving away from emergency policy may look like. The tapering process for asset purchases could closely mirror that from the last cycle while he expects no rate moves until late 2023 at the earliest.

Evans Said Fed Doesn’t Need to Respond to Rise in Yields: Chicago Fed President Evans expects a strong 2021 recovery and unemployment to drop to 5% by the end of the year. He cautioned, however, that the unemployment rate doesn’t capture the many workers who have left the labor force, a factor he suspects will keep inflation from rising too quickly above 2% on a sustained basis. He echoed others by saying the rise in yields reflects a market more optimistic on the outlook and doesn’t see any need for the Fed to intervene. The Fed could lengthen the duration of asset purchases or implement yield curve control if needed, but these aren’t policy tools he is even considering now.


Jobless Claims Show Fractional Improvement: Initial jobless claims for the week ending February 27 rose 9k to 745k, a positive result insomuch as claims didn’t rebound sharply higher after last week’s large decline.  Initial PUA claims rose 9k to 437k, including an outsized increase of 38k in Ohio (+18%).  Combining both programs, total new claims for unemployment rose 18k to 1.18 million, still inconsistent with a resumption of the labor market recovery.

Continuing Claims Decline but Pandemic Programs Remain Volatile: Continuing jobless claims for the week ending February 20 fell 124k to 4.30 million, the lowest weekly level since last March.  Thirty-six states reported improved results.  California’s week-over-week reporting, particularly in the pandemic programs, continues to create noise for the national tallies.  Continuing PUA claims fell 192k to 7.33 million.  California reported a decline of 588k while Michigan reported an increase of 296k. Continuing PEUC claims fell 601k to 4.47 million.  California reported a decline of 691k and Michigan reported an increase of 141k.  Combined, total persons filing for unemployment assistance for the week ending February 13 declined 1.0 million to 18.03 million. While the state-by-state data remain volatile, the overall trend continues to show a still-high rate of usage of the unemployment programs but a slow, albeit insufficient, rate of improvement for the labor market.

Factory Orders: At 9:00 a.m. CT, the January Factory Orders report is expected to show a strong month for orders.  The data will include the final revisions to core capital goods orders and shipments for the month, initially reported as +0.5% and +2.1%, respectively.

Focus on Powell’s Virtual Speech Today: Fed Chair Powell will speak via a virtual event hosted by the Wall Street Journal at 11:05 a.m. CT.  Speculation continues that he may reference changing the bond buying program to an Operation Twist-style structure, swapping shorter maturities for longer maturities in an effort to limit the ceiling on longer yields while also providing a floor for shorter yields.  It appears unlikely that financial conditions have become worrisome enough to warrant such a move, particularly given the limited number of easing tools the Fed has available today and that no Fed official has indicated concern about the recent rise in yields.

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