The Market Today
Senate Taking Up Stimulus Package; TX and MS Blaze New Trail
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Stimulus Watch: The Senate is expected to take up the House’s $1.9 trillion stimulus bill today and top Democrats have expressed confidence about quickly passing the legislation, with some saying it could be approved as early as this weekend. However, there continued to be discussions around key components of the bill on Tuesday. One moderate Democrat proposed lowering the income thresholds for determining eligibility for the $1,400 economic impact payments while another said he preferred keeping the Federal unemployment supplement at $300 per week as opposed to raising it to $400 as prescribed in the House plan. Under Senate reconciliation rules, the bill will need support from all 50 Democratic Senators to pass, assuming no Republicans support the package.
Vaccines: President Biden said that any state that has not already prioritized teachers to receive vaccines should do so and said he now expects enough doses to be available to inoculate every American by the end of May, primarily because of the recent approval of the Johnson & Johnson vaccine. The Department of Health and Human Services said the company, who joined forces with Merck to produce shots, will run production facilities around the clock.
Virus Restrictions: Despite recent warnings from health officials, several states pared back restrictions on Tuesday. Texas and Mississippi announced the end of their statewide mask mandates and removed restrictions on certain businesses and activities. Michigan and Louisiana also announced the easing of some measures that had limited business activity.
24 HOURS OF MARKET ACTIVITY
Stocks and Yields Continued to Fluctuate: Monday’s strong gains for U.S. equities were partially unwound by modest declines on Tuesday and Treasury yields ended lower after rising ahead of U.S. trading. The S&P 500 closed down 0.8% and near its daily low as 11 of its underlying 12 sectors reversed a portion of the prior day’s gains. Tech led all declines, consistent with the Nasdaq’s underperformance and 1.7% decline. The economic calendar was unusually quiet, keeping attention on the pushes for more vaccine doses and additional stimulus. After climbing as high as 1.45% during European trading, the 10-year yield ultimately ended the day down 2.6 bps at 1.39%.
Equities Recover Globally, Yet to Be Perturbed by Resultant Jump in Yields: Stocks have reversed Tuesday’s downward trend overnight, both in the U.S. and globally, and have yet to be disturbed by a resultant rise in global sovereign yields. Prior to the release of this morning’s ADP payroll estimate, U.S. futures were roughly 0.5% stronger and the Treasury curve had steepened higher, led by a 7.6-bp increase for the 10-year yield to 1.47%. Stocks in Asia had earlier closed up 1.3% and Europe’s Stoxx 600 was holding on to a 0.3% gain. With the U.S. Services PMI data on deck, China’s PMI dipped from 52.0 to 51.5 in February while Japan and Europe’s initial estimates were revised up, although both still signaled activity contracted last month. Most European sovereign yield curves saw 10-year borrowing costs rise by more than 4 bps, although U.K. yields rose even further after the government extended many of its fiscal support measures by six months as part of its annual budget announcement, which included an additional 65 billion pounds of pandemic aid. Equity futures dipped on the softer-than-expected ADP result while the 10-year Treasury yield remained up by more than 7.0 bps on the day.
Fed Governor Brainard (2021 voter) said her personal outlook has “brightened” in recent weeks but noted that the economy is “far from our goals in terms of both employment and inflation.” Addressing the impact of pent-up demand and further fiscal support on prices when more of the economy reopens, she said, “A burst of transitory inflation seems more probable than a durable shift above target in the inflation trend and an unmooring of inflation expectations to the upside.” When asked about last week’s market volatility, she responded that she’s “paying close attention,” adding that, “Some of those moves last week, and the speed of the moves, caught my eye.”
Fed President Daly (2021 voter) has been encouraged by a move up in inflation expectations recently but is skeptical that actual inflation will be sustained at a concerning level, even considering the potential for additional fiscal stimulus. “The world today is different, and we can’t let those memories, those scars, dictate current and future policy,” referencing periods of double-digit inflation in the 1970s. The Fed must remain patient and “will need to continually reassess what the labor market is capable of and avoid preemptively tightening monetary policy before millions of Americans have an opportunity to benefit.”
Auto Sales Cool More than Expected in Wintry February: Auto sales declined more than expected in February, potentially impacted by the winter storms that froze much of the country for several days during the month. Total sales dropped from an annualized 16.63 million pace to 15.67 million pace, coming up short of the 16.00 million economists had projected. February’s decline pulled the pace to a three-month low and left sales nearly 7% shy of February’s pre-pandemic pace.
ADP Payroll Report Shows Slowing Pace of Recovery: Private payrolls grew just 117k in February according to the ADP employment report, disappointing already low expectations. Service sector jobs gained just 131k with 8.7 million payrolls (8.1%) still missing since last February’s peak. Goods-producing jobs fared even worse in February, down 14k but the sector is missing only 875k payrolls (-4.2%) from last February’s peak. The pace of payroll recovery has slowed to a crawl with a significant deficit still remaining. On a positive note, the pace is likely to accelerate in coming months as more and more of the country is vaccinated, cases hopefully decline, and businesses are able to reopen.
Mortgage Rates Jump 15 BPS in Weekly MBA Data: Mortgage applications for the week ending February 26 rose 0.5% as purchase apps recovered 1.8% after the snowstorm week and purchase apps inched up 0.1%. Mortgage rates are now tracking longer Treasury yields higher. The average 30-year mortgage rate jumped 15 bps to 3.23%, the third-largest weekly increase in the past five years. An important benchmark to remember, the average 30-year mortgage rate on outstanding mortgages at year-end was 3.63% according to Federal Reserve data.
ISM Services: At 9:00 a.m. CT, the ISM service sector index is expected to remain flat in February.
Fed Beige Book and Speakers: The Fed will release its Beige Book Report at 1:00 p.m. CT in anticipation of its March 17 FOMC Meeting. Speaking today are Philadelphia’s Harker (9:00 a.m.), Atlanta’s Bostic (11:00 a.m.), and, Chicago’s Evans (12:00 noon).