19.02.2021 -
As of noon on Friday, the rally in global equities paused as government bond yields added to recent gains. Investors anticipate at least a temporary bout of inflation in coming months, and growth is expected to improve dramatically as vaccine rollouts gather pace and infection levels fall. The yield on the benchmark US 10-year note rose 13 basis points to 1.32% this week, the highest level in a year, and government bond yields firmed globally. The price of a barrel of West Texas Intermediate crude oil continued its advance, rising more than $2 to $60.20 as parts of the United States dealt with unusually frigid weather that limited production. Volatility, as measured by the Cboe Volatility Index (VIX), firmed modestly on the week to 22.25.
MACRO NEWS
Moving on up US yields have been moving higher for mostly the "right" reasons: Investors are optimistic over the prospects for an economic reopening as vaccine distribution accelerates, and they are heartened by expectations that another massive wave of fiscal stimulus will boost growth (albeit also the deficit). Also underpinning yields is the US Federal Reserve's pledge to allow the economy to "run hot" in order to offset earlier inflation shortfalls and reduce labor market scarring. So far, equity markets have absorbed the somewhat-higher-rate environment without much upset, though some stocks with massive P/E ratios have experienced some selling pressure.
Yellen tips tax hikes to fund US infrastructure US Secretary of the Treasury Janet Yellen this week reiterated her view that the risks of not going big on a coronavirus relief package far outweigh the costs. Should the package, which is expected to cost almost $2 trillion, spark a surge in inflation, Yellen said that her former employer, the Fed, has the tools to deal with any upward price pressures. She said the Biden administration intends to introduce an infrastructure package later this year and that tax hikes will likely be part of the proposal, though she did not provide details. Yellen warned that equity valuations are very high in the current low-yield environment and cautioned investors to be very careful in certain sectors. Tariffs on Chinese imports will remain in place while the administration determines the appropriate strategy on China going forward, the secretary said.
US economy shows signs of recovery Even in advance of another wave of fiscal stimulus, the US economy appeared to perform strongly in January despite still-high levels of coronavirus cases during the month. Retail sales surged 5.3% in January, beating expectations by a mile, while industrial production rose 0.9%, almost a prepandemic level of output. Producer prices surged during the month as well, rising 1.3%. Taken together, the data point to a reflationary environment, one that should persist as infection levels recede. Additionally, the Conference Board's CEO confidence survey showed that chief executives have not been this confident since 2004. 36% of those surveyed said that they plan to increase wages by more than 3% in the next year. Just 12% plan to cut jobs.
Vaccine study may lead to increased availability A study of 9,000 Israelis shows that one dose of the Pfizer/BioNTech vaccine decreased infections by 85%, not too far below the 95% efficacy of the two-dose regimeThe study shows that the vaccine can be stored safely using consumer-grade freezers and does not require the ultracold equipment previously thought necessary to preserve it, thus reducing transportation and distribution challenges. The Israeli survey suggests that spacing out second doses could allow faster distribution to a wider number of individuals, helping to halt the virus's spread. The United Kingdom has already adopted that approach, with promising results. Bloomberg reported on Friday that the US vaccine supply is expected to double in coming months as production ramps up.
Winter weather causing havoc in Texas, elsewhere The South Central US was hit with an unusually persistent cold snap that has left millions without power as the region's electrical grid experiences massive disruptions. The temperatures were so cold that US oil and gas production dropped by a third amid a surge of demand and pipelines froze. Worsening a global semiconductor shortage, multiple chip producers based in Texas were forced to halt production. Vaccine distribution is expected to be impacted as airfreight hubs in the Mid-South were heavily impacted.
QUICK HITS
US President Joe Biden reportedly told governors that a rise in the minimum wage to $15 probably won't be part of his coronavirus relief package.
Mario Draghi won confidence votes in both houses of Italy's parliament by sweeping majorities this week, empowering the former European Central Bank president to enact his recovery agenda as the country's prime minster.
Saudi Arabia plans to increase oil output in coming months amid confidence about the sustainability of the recent price recovery.
The ongoing backup in US interest rates has cooled mortgage demand a bit. The average 30-year mortgage rate is at a three-month high of 2.81%, but that is still below year-ago levels by nearly 75 basis points.
EARNINGS NEWS
With 83% of the constituents of the S&P 500 Index having reported for Q4 2020, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings growth is running at 3.1% and sales rose 3% compared with the same quarter a year ago, according to data from FactSet Research. About 80% of companies are beating analysts' estimates this quarter, the highest percentage since FactSet began gathering the data in 2008.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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