The Market Today
Positive Momentum Builds
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Stimulus Watch to Remain a Focus in the First Half of March: Senate Majority Leader Schumer said Senators will consider the $1.9 trillion stimulus package passed by the House this week.
24 HOURS OF MARKET ACTIVITY
Risk Assets Recover Strongly as Treasury Yields Calm: Positive overnight momentum picked up steam during U.S. trading, pushing the S&P 500 up by the most in a single day since June. Several developments were behind the strong start for global risk assets to start the week. Likely of most comfort to investors, global bond markets settled down after a violent sell-off last week briefly pushed the 10-year Treasury yield up to as high as 1.61%. On Monday, the 5-year Treasury yield fell 3.5 bps to 0.70% after jumping 15.9 bps last week. The 10-year yield inched 1.2 bps higher to 1.42% following its 8.1-bp increase last week. Adding to the market’s enthusiasm, House Democrats successfully passed a $1.9 trillion stimulus bill on Saturday and Johnson & Johnson received emergency FDA approval for their vaccine on Sunday. On Monday, the ISM’s manufacturing index for February beat expectations and private sector construction spending firmed up, helped out by the first gain in nonresidential spending since June. For the day, the S&P 500 rose 2.4% on the back of gains across all 11 sectors, just shy of a full unwind of last week’s loss. The Nasdaq posted a larger 3.0% gain while the Dow added just under 2%. Small cap stocks fared even better, evidenced by the Russell 2000 jumping 3.4%.
Calmer Markets Continue Tuesday: Monday’s calmer market tone continued overnight and into Tuesday. U.S. equity futures inched lower following yesterday’s strong gains and amid a controlled move higher for Treasury yields. Splitting larger declines for Asian equities and solid gains across Europe, U.S. index futures were hovering just below unchanged at 7:15 a.m. CT. Treasury yields drifted higher and steeper in a more synchronous fashion after diverging Monday. The 2-year and 5-year notes had added around 1.0 bps to 0.13% and 0.71%, respectively, trailing a 2.8-bp increase in the 10-year yield to 1.44%. Although the U.S. economic calendar is nearly empty, other countries released reports of interest. Australia’s central bank left interest rates unchanged and expects to do so “until 2024 at the earliest.” German retail sales contracted 4.5% in January, severely disappointing estimates for a 0.3% gain. And Eurozone inflation of 0.2% MoM in February dropped the YoY core rate from 1.4% to 1.1%.
ICYMI – February 2021 Monthly Review: Since the middle of January, investors have been forced to contemplate the impact of an ebbing pandemic and advancing vaccine rollout, improving economic data, a Fed committed to accommodation, and lawmakers inclined to unleash another round of significant federal stimulus on the outlook for growth and inflation. That story continued to be the main driver of markets throughout February and resulted in a significant increase in volatility. Treasury yields spiked and equities were knocked down from record levels as concerns grew around the potential for uncontrolled inflation. Click here for the full monthly review.
ISM Manufacturing Index Shows Continued Strength, Supply Chain Disruption, and Rising Prices: The February ISM Manufacturing index beat expectations rising 2.1 points to 60.8, matching its highest level since 2004. Part of the headline strength came from a further slowing in supplier deliveries; the index jumped from 68.2 to 72.0 as the supply chain remains constrained. However, the headline index remains quite strong even excluding the supplier delivery contribution. New orders, employment, and new export orders all saw improved results. Adding to the concerns evident in the markets, the prices index rose to its highest level since 2008, up from 82.1 to 86.0.
Residential Construction Continues to Beat Expectations in January: Construction spending started 2021 on a strong note, rising 1.7% in January as residential investment continued to lead the way. Private residential spending jumped another 2.5% MoM, now up 21.0% YoY, as single family activity increased 3.0% and home improvements gained another 2.3%. Public construction increased 1.7% on a 5.8% gain in spending on highways/roads. Perhaps most encouraging, private non-residential construction saw a rare month of improvement, up 0.4% as manufacturing construction climbed 4.9%. Private non-residential construction remains down 10.1% YoY, lead by a 22.7% decline in spending on lodging.
Speculation Fed May Adopt Twist-Style Bond Purchase Plan: The idea is gaining attention that the Fed could pursue an Operation Twist-style approach to their $120 billion in monthly securities purchases to address rapidly rising longer rates and low short-end rates. A Bank of America research note highlighted that such a change “kills three birds with one stone: It pulls up front end rates, it stabilizes back end rates, and it does so in a reserve neutral way that lessens bank SLR pressure to hold more capital.” While such a policy change could make sense if financial conditions deteriorate further, policymakers are likely embracing some slope in the yield curve and are unlikely to be alarmed by the 10-year near 1.50%.
Still Not Concerned about Higher Rates: Richmond Fed Bank President Barkin dismissed concerns about the recent run-up in Treasury yields. In Bloomberg interview yesterday, Barkin said he is “mostly concerned about the labor market” and that he was not hearing concerns from his business contacts about yields being too high and discouraging investment.
Auto Sales Snowed Out; Fedspeak: February’s auto sales data is expected to show sales dip from 16.6 to 16.0 million as snow was unusually disruptive during the month. Sales were at a 16.8 million annualized pace in February 2020, the month before the virus decimated activity. On the calendar to speak today are Fed Governor Brainard and San Francisco Bank President Daly.