The Market Today
Powell: May Take Three Years to Reach Inflation Goal
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Further Improvement in Vaccine Availability Expected: A member of the White House COVID-19 Task Force said that the vaccine backlog created by last week’s winter storms is receding rapidly. That followed the bigger news that the FDA found Johnson & Johnson’s vaccine to be safe and effective. An FDA panel made up of outside advisers is scheduled to meet Friday to discuss whether or not to recommend emergency approval for the shot. Later in the afternoon, Moderna said it has completed production of a shot targeting the South Africa strain and shipped it to the NIH for study. The company also said it now expects to produce 700 million doses of its initial vaccine this year, up from an earlier forecast of 600 million, and 1.4 billion doses in 2022, higher than the 1.2 billion doses it had planned for.
24 HOURS OF MARKET ACTIVITY
Volatility In U.S. Assets Picks Up As Treasury Yields Fluctuate Higher: Markets were quite volatile Wednesday as investors continued to contemplate the net impact on the outlook for growth and inflation of improving economic data, an ebbing pandemic and advancing vaccine rollout, a Fed committed to accommodation, and lawmakers inclined to unleash another massive round of federal stimulus. Stock futures had climbed back overnight after a Tuesday decline, but cratered on a sharp spike in Treasury yields ahead of U.S. trading. After rising as much as 0.5% during European trading, S&P 500 futures flipped to a 0.6% loss as the 10-year Treasury yield abruptly moved from 1.362% to 1.434%. However, as trading continued, the move up in Treasury yields abated, energizing the major equity indices which climbed steadily higher through lunch. Holding those gains through the afternoon, the S&P 500 ended 1.1% higher and split similarly strong gains for the Dow, which set a new record high, and Nasdaq. Cyclical stocks led the way while tech names also recovered. By the close, the 10-year Treasury yield was well below its morning high but still finished up 3.4 bps to 1.376%, a 12-month high.
Yesterday’s price action on Wall Street excited indices across Asia but has had a fleeting effect on stocks in Europe, where analysts say a busy day of corporate earnings was a major focus. The MSCI Asia Pacific Index pushed 1.4% higher while Europe’s Stoxx 600 erased an opening gain and was marginally weaker around 7 a.m. CT. Volatility for U.S. assets picked back up, with futures on the tech-heavy Nasdaq dropping more than 1% to lead a broader weakness as Treasury yields broke higher again ahead of a busy morning of important U.S. economic data. The 10-year Treasury yield was near its highest levels of the day at 7:25 a.m. CT, up 8.2 bps amid another global move higher to a new pandemic peak of 1.46%. Despite a commitment from multiple top Fed officials this week to keep rates low, including Fed Chair Powell, the 2-year Treasury yield had risen for a sixth session, up 2.0 bps to 0.143%, its highest since January 13. The 10-year yield was 6.5 bps higher at 1.44% at 7:40 a.m. following the morning economic releases.
New Home Sales Stronger Than Expected in January and Late-2020 Activity Revised Higher: Sales of new homes were stronger than expected to start 2021 and the fourth quarter trend was better than previously estimated. Sales rose 4.3% in January to a 923k-unit annualized pace, beating expectations for a 1.7% gain to a pace of 856k units. In addition to January’s strength, the average monthly sales pace during the fourth quarter of 2020 was revised up from 873k to 896k on a cumulative three-month revision of 69k units. January’s sales pace remained below last July’s 14-year-high pace of 979k, but marked a three-month high and an 18.6% year-over-year gain on a non-seasonally-adjusted basis.
Fed’s Clarida Sticks Close to Powell’s Message on Continued Accommodation: Fed Vice Chair Clarida’s comments on Wednesday closely aligned with Chair Powell’s message to Senators on Tuesday. The economic outlook has improved in recent weeks as cases have declined and vaccine distribution has picked up. However, Fed policy will remain accommodative until officials are confident their twin goals will be reached, an achievement that will take some time to accomplish. Clarida said releasing pent-up demand later this year could push prices up temporarily but won’t spark sustained inflation pressures. Chair Powell told members of a House financial committee that “it may take more than three years” for inflation to meet the Fed’s goal.
Brainard Sees Long Road Back to Full Employment: Fed Chair Powell said in an exchange with a Senator on Tuesday that reaching maximum employment is bigger than simply monitoring the unemployment rate. He said the Fed monitors a host of labor market indicators, particularly the level of labor participation which is better accounted for by the employment-to-population ratio. In a speech focused on employment, Fed Governor Brainard said Wednesday that the labor market is far from full employment, with the actual level of unemployment running closer to 10% than 6.3% when a drop in participation is accounted for. She noted that transitory inflation pressures may appear as the economy reopens, but stressed that the Fed will not respond to transitory inflation.
Initial Jobless Claims Show Better Traction for Labor Recovery: Initial jobless claims for the week ending February 20 fell 111k to 730k, the best report since November. On a non-seasonally-adjusted basis, the week saw the best results since pre-pandemic. New PUA claims also declined, down 61k to 451k. Total new filings for unemployment assistance fell 172k to 1.18 million, an improvement but remaining in the well-established trend range.
Except for Volatility in PEUC Program, Continuing Claims Improve Also: Continuing jobless claims also improved more than expected for the week ending February 13, down 101k to 4.42 million, the lowest level since the onset of the pandemic. Continuing PEUC (extension) claims for the week ending February 6 continued to exhibit significant volatility, rising 1.00 million to 5.07 million, the highest level of the pandemic. Driving the gains were outsized increases in California (+856k) and New Jersey (+262k). A little more encouraging, continuing PUA claims fell 167k to 7.52 million. While there was notable state-level volatility in California, Georgia, Texas, and Michigan, the broader signal of improvement appears accurate.