The Market Today
Personal Income Jumps 10% as Stimulus Flows to Households
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Personal Income Jumps 10% in January as Stimulus Flows to Households: Personal income jumped 10.0% in January, primarily the result of a $1.67t (annualized) increased in other transfers. This reflects the direct payments to households from the December stimulus program. Also driving incomes higher, the recommencement of unemployment assistance added $263b while the resumption of PPP loans added $24b to nonfarm proprietors’ income. Apart from the latest round of stimulus, employment and wage income both rose 0.2% ($87b and $70b, respectively) and are both now back above their February 2020 level for the first time. This comes despite 19m people continuing to file for some form of unemployment assistance.
Savings Increase Further as Spending Cannot Keep Pace with Income: Spending once again lagged the big jump in income, rising 2.4%. This brought the savings rate up to 20.5%. De-annualizing the figures to project absolute levels of pent up savings, it now appears that consumers are sitting on $1.8T in cumulative savings, some of which has presumably been used to pay down debt or for investment, which could turbocharge consumption once economic activity fully resumes.
PCE Inflation Firmer than Expected: PCE Inflation was firmer than expected in January, with core prices rising 0.3% (exp. +0.1%) bringing the YoY rate up from 1.4% to 1.5%. Headline inflation also rose 0.3% MoM.
Flows Pick Up but Trade Deficit Widens Again: The U.S. goods trade deficit swelled early in 2020 as the pandemic shut down global economic activity and remained wide throughout the year as the U.S. recovery outpaced the healing in Europe. While both imports and exports rose in January, the deficit widened again, from -$83.2b to -83.7b, larger than the -$83.0b economists expected. Most categories saw improved trade flows while auto activity slowed, likely a reflection of the effects of a global chip shortage on production.
Mixed Inventory Data: Inventories were accretive to growth in the second half of 2020, and are expected to be a tailwind in 2021 as companies look to rebuild stock in response to improved demand as the pandemic eases. Retail inventories, which saw the sharpest decline amid the pandemic, fell 0.6% unexpectedly in January but December’s 1.0% gain was revised up to 1.9%. Wholesale inventories, the second hardest hit during the recession, rose 1.3%, beating the expected 0.4% gain, and saw positive prior revisions.
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Surging Treasury Yields Sends Stocks Stumbling Again as Fear of Higher Rates Takes Hold: A pandemic in retreat and recovery in the making has combined with Democrats’ push for nearly $2 trillion in additional stimulus to send Treasury yields to new pandemic highs in recent sessions. While yields had already made eye-catching moves up in morning trading, the sell-off reached a fever pitch after a wildly disappointing 7-year Treasury note auction tailed by more than 4 bps on plunging indirect demand and a record low bid-to-cover ratio. The 5-year Treasury yield spiked as high as 0.86% as the 10-year yield briefly broke above 1.60%, representing daily increases of more than 25 bps and 23 bps, respectively. While the moves moderated somewhat from there, the 5-year yield finished up 21 bps at 0.82% and the 10-year yield added 14.4 bps to 1.52%, both the highest levels since the pandemic began. Worth noting, shorter maturities weren’t spared from the intraday volatility. After adding as many as 6.5 bps to 0.188%, its widest daily range and sharpest daily increase since March, the 2-year yield closed up 4.9 bps at 0.172%, marking the highest closing yield since mid-November.
Equities tumbled in response to Thursday’s yield surge. The Nasdaq led losses with a 3.5% decline and a close near its low point of the day. The tech sector finished near the bottom of the S&P 500, although the rising-rate fears rattled all 11 sectors and hit certain corners of the market especially hard. The rate-sensitive homebuilding and auto names, whose business has been a bright spot during the pandemic due to record-low rates, sank 6.3% and 7.4% respectively. The broader S&P 500 closed down 2.5% and the Dow dropped 1.6%.
Foreign Equities Fall Friday Despite Calmer Treasury Market; Bank of England Economist Verbalizes Market Fears: Thursday’s negative momentum knocked stocks in Asia down more than 3% on Friday and had pulled Europe’s Stoxx 600 nearly 1% lower. However, the upward pressure on Treasury yields eased overnight before U.S. trading, helping alleviate the downward pressure on U.S. equities. The 10-year Treasury yield was 4.6 bps lower at 1.47% just before 7 a.m. CT and U.S. index futures were mixed with the Nasdaq and S&P 500 staging modest recoveries of less than 0.3%. Yields also fell across Europe, making a rise in U.K. yields more conspicuous. U.K. yields shot higher after the Bank of England’s chief economist said, “there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets.” Verbalizing one of the forces behind the recent yield surge, he added, “People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary cat out of the bag.”
Pending Home Sales Pull Back to Start 2021: Pending home sales fell 2.8% in January, disappointing subdued expectations for no change to start 2021, as sales declined in three of the four geographic regions and moderated in the South. Declines in three of the last five months have pulled the pending sales index to a six-month low, signaling some expected softening in existing home sales early in 2021. While some of the net decline in the overall trend was absorbed by positive revisions to prior months, the year-over-year rate of gain for non-seasonally-adjusted sales slowed to 8.2%, well above the pre-pandemic trend but the weakest pace since May.
Fed’s George Hides Her Hawkish Feathers with a Call to Keep Policy Accommodative: Kansas City Fed President George, among the more hawkish Fed officials, said “it’s too early” for the Fed to consider easing up on its accommodative policy stance. Commenting on the rise in longer yields, with the 10-year yield 8.0 bps higher at a new pandemic high of 1.46% as she spoke, George said the move reflected growing optimism in the outlook and didn’t necessitate a response from monetary policymakers. As others have in recent days, she said additional fiscal stimulus would further accelerate the economic recovery but believes the risk to it leading to overheating is low.
Williams Bets Inflation Will Remain Subdued Despite Potential for Strongest Growth “in Decades”: New York Fed President Williams said the outlook is improving and believes growth could be exceptionally strong this year. “With strong federal fiscal support and continued progress on vaccination, GDP growth this year could be the strongest we’ve seen in decades,” Williams said. However, “With our economy and the global economy still far below full strength, I expect underlying inflationary pressures to remain subdued for some time.” Echoing his colleague from St. Louis, Williams said he welcomes the recent increase in inflation expectations.
Bostic Brushes Off Concerns about Higher Rates amid Yield Surge: As the 5-year and 10-year Treasury yields surged by more than 20 bps on the day, Fed President Bostic told reporters he is “not worried” about the rise in yields and doesn’t have a particular pain point at which he would feel compelled to respond. He emphasized that while rates have moved up rapidly so far this year, they remain “very low” historically. In a speech before those comments, he said he expects growth to pick up later this year but will be “very, very patient” on monetary policy considering the “deep hole” the economy is still in.
Bullard Says Higher Yields “Appropriate” and a “Good Sign”: Before Treasury yields broke loose to their highest levels of the day, St. Louis Fed President Bullard said the recent rise in yields did not worry him, describing it as “appropriate” considering the improving outlook and likely a “good sign” for the recovery. He emphasized that even after the recent correction, yields remain below their pre-pandemic levels. He remains optimistic on the trajectory of the recovery and expects unemployment to fall to 4.5% by the end of the year. He said he does expect inflation pressures to pick-up but not get out of hand and stressed that the Fed will be less preemptive to respond with tighter policy.