26.02.2021 - Inflation fears undermined equity and bond markets this week, sending the yield on the benchmark US 10-year Treasury note briefly as high as 1.61% on Thursday before it eased to 1.47% on Friday morning. A week ago the note traded at around 1.32%. Global equities dropped late in a volatile week in large measure due to climbing yields. The Cboe Volatility Index (VIX) rose to 28 from 22.25 a week ago while West Texas Intermediate crude oil prices firmed a bit over $2 a barrel to $62.50.
MACRO NEWS
Markets begin pricing in rate hikes; Fed stays dovish
There is a growing disconnect between monetary policy and the US Treasury market. US Federal Reserve Chair Jerome Powell this week delivered the central bank's semiannual monetary policy report to Congress, maintaining a decidedly dovish tone. However, he did not push back against the recent rise in bond yields, saying it is a sign of market confidence that a robust recovery is to come. Powell said that it will take some time for the economy to reach the Fed's inflation and employment goals and that the central bank will continue to support the economy with near-zero interest rates and large-scale asset purchases "until substantial further progress has been made toward the committee’s maximum employment and price stability goals." This week's market action saw futures markets price in the first rate hike by the end of 2022, a year sooner than the Fed forecasts.
Solid US data underpin rate rise
Despite numerous COVID-19 restrictions being in place last month, January US economic data look solid. Durable goods orders rose much more than expected on the month, up 3.4%, an improvement from an upwardly revised 1.2% advance in December. New home sales rose 4.3% last month, and the Case-Schiller home price index rose 10.1% year over year. Personal income surged 10%, and spending rose 2.4% as additional stimulus payments made their way into consumers hands. The core personal consumption expenditures price index, the Fed's preferred inflation measure, rose to 1.5%, slightly ahead of expectations but below the Fed's 2% target.
US rate rise prompts ECB reaction
European Central Bank officials have pushed back against a rise in European government bond yields brought on by the spike in US rates. ECB President Christine Lagarde said the central bank is carefully monitoring the evolution of long-term yields, a veiled warning to the market. Additionally, Executive Board Member Isabel Schnabel, a German who is in charge of the ECB's quantitative easing program, said late in the week that the ECB may need to boost its monetary support of the economy if rising borrowing costs hurt growth. Though benchmark German 10-year bund yields are still deeply negative at -0.27%, they have risen from -0.55% in the past month.
Minimum wage hike fails to meet parliamentary muster
A move to include a federally mandated multi-year hike in the US minimum wage from $7.25 an hour to $15 over the next few years failed to win the approval of the US Senate parliamentarian to be included in COVD relief legislation under the body's arcane budget reconciliation rules which allow legislation to be passed with a bare majority rather than the usual 60-vote super-majority. Meanwhile, the US House of Representatives is set to vote on the overall $1.9 trillion relief package today, after which the bill will advance to the Senate, where the price tag may be whittled down modestly.
QUICK HITS
The US economic growth rate was revised up to 4.1% from 4.0%.
In next week's budget announcement, the United Kingdom is expected to propose raising the corporation tax rate from 19% to between 23% and 25%. If the United States raises its own corporate tax rate from 21% to 28%, as recently called for by Secretary of the Treasury Janet Yellen, the UK would maintain the crown as having the lowest corporate tax rate in the G7.
The US 10-year Treasury note yield has drawn even, at 1.47%, with the dividend yield on the S&P 500 Index. Low yields had been a key factor underpinning the recent equity rally.
Surging demand and rising inflation expectations have seen the Bloomberg commodity index surge to an eight-year high, and up about 10% year to date.
Former Federal Reserve Bank of New York chief William Dudley said this week that he expects inflation to rise in the near term but that it is unlikely to get out of hand.
The US Food and Drug Administration found this week that Johnson & Johnson's coronavirus vaccine is safe and effective. An independent review panel meets today, setting the stage for an emergency use authorization as soon as Saturday. Up to 20 million doses of the single-shot vaccine are expected to be available by the end of March.
Saudi Arabia issued euro-denominated three-year bonds at a yield of -0.057%. Rebounding oil prices helped solidify demand for Saudi paper.
The US Department of Labor this week expanded eligibility for unemployment insurance to include those who have turned down jobs offers because they fear unsafe working conditions.
At her confirmation hearing, Katherine Tai, US President Joe Biden's nominee for US Trade Representative, backed tariffs as a legitimate tool to counter China. She said China needs to deliver on promises made in the phase-one trade agreement.
EARNINGS NEWS
With 96% 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 3.8% and sales rose 3.2% compared with the same quarter a year ago, according to data from FactSet Research. Close to 80% of companies beat analysts' estimates this quarter, surpassing them by an average of around 15%.
Hinweise:
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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