The Market Today
Personal Income Pulls after December Stimulus Back but Expected to Soar
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
The U.S. reported 89k new COVID-19 cases yesterday, its largest number of daily COVID-19 cases since early-February and 35k above the 7-day average. Brazil recorded 100,158 new cases, a daily record for the country. The head of the European Commission said the EU will ban exports of AstraZeneca’s vaccine, including to the U.K., until it meets its commitments to Europe. Nineteen European countries temporarily banned AstraZeneca’s vaccine last week over concerns about side-effects.
Rise in Rates Tempered Momentarily, but Back on the Move Overnight: The 10-year Treasury yield dropped back below 1.60% in early trading yesterday, helping lift stock prices which have shown some sensitivity to rising rates of late. The yield did not hold below 1.60% for long but only rose to 1.63% by the end of the day, 2 bps above Wednesday’s close, despite another lackluster 7-year note auction. Stocks, meanwhile, were encouraged by the temperance in yields along with the notion of another round of federal spending. The S&P finished up 0.5% for the day while the DJIA gained 0.6%. Coming into this morning, there is more optimism after the Fed freed up large banks to increase dividends (more below), despite the continued concerns about the growing number of supply chain disruptions. The Ever Given is reportedly expected to take up to a week to be resolved, unblocking the Suez Canal. The 10-year Treasury yield is back up to 1.67% while equity futures are effectively unchanged.
Fed Says Large Banks Can Increase Dividends If Pass Stress Test: The Federal Reserve announced yesterday that large banks which pass the next stress test will be able to increase dividends after June 30. Banks have been prohibited from increasing dividends during the COVID-19 pandemic in an effort to bolster capital.
President Biden Says Next Spending Plan Likely Released Next Week: President Biden held his first White House press conference since his election. He doubled the vaccination goal of 100 million shots in his first 100 days to 200 million, voiced his support for reforms to the filibuster rule, and alluded to the release of his next budget proposal sometime next week.
Clarida Does Not See Risk in Financial Conditions: Fed Vice Chair Clarida dismissed concerns regarding inflated asset valuations saying, “Markets are forward looking and my interpretation of asset valuations and liquidity and capital and leverage right now is that they are broadly consistent with the baseline view of a very robust recovery, ample fiscal support, successful vaccination.”
Bostic Unambiguously Content at the Moment, Sees First Hike in 2023: Atlanta Fed Bank President Bostic (voter) dismissed inflation concerns, citing an “uneven economic recovery” when evaluating a “broader set of employment measures”. As it applies to policy, Bostic said, “Let me say unambiguously that I am not at the moment thinking we will need to remove policy accommodation soon.” However, he went on to add, “My view can change if conditions warrant. But I don’t think that’ll happen in the next few months.” For now, he said he is projecting the first rate hike to occur by 2023.
Evans Sees First Rate Hike in 2024: Chicago Fed Bank President Evans (voter) believes there will be a temporary period of higher inflation but by 2022, “we’re still going to be struggling to get inflation to 2%.” In that environment, Evans said, “I suspect that it might be 2024 before we actually raise our interest-rate target.”
Goods Trade Balance Shows Trade Continuing to Recover: The advanced goods trade balance showed a $3.0 billion larger monthly deficit in February, slightly larger than expected, as imports declined 1.4% and exports fell an even-larger 3.8%. Overall goods trade volume declined 25.5% from December 2019 to May 2020 as the pandemic disrupted global activity. While the February data are disappointing with overall volume down 2.3%, it remains above the pre-virus level.
Personal Income Pulls Back after Stimulus, Set to Soar: Personal income fell 7.1% in February after the December stimulus payments primarily filtered through incomes in January. Transfer payments fell $1.58 trillion (annualized) as a result of the one-time nature of the direct payments.
Wage income mirrored the slowdown in the jobs recovery, unchanged for the month. Spending fell 1.0% during the month but January’s tally was revised up from +2.4% to +3.4%. The data is consistent with other data showing the economy had more momentum to begin 2021 but that the February weather momentarily put the brakes on the recovery. With income down and spending down, the savings rate dropped from 19.8% to 13.6%. Total excess savings accumulated since the pandemic began now total $1.92 trillion.
Most importantly, incomes are expected to see their largest monthly gains of an unusual pandemic period in the March report as the American Rescue Plan Act stimulus checks are delivered. The plan called for payments of $1,400 per person for a total of $410 billion, 37% more than the $300 billion distributed under the CARES Act. In addition, March spending should benefit from the post-February weather.