Traders on the floor of the New York Stock Exchange
Source: New York Stock Exchange
The Covid-19 aid program is on track for final congressional approval in the coming week – and it could be a double-edged sword for the markets.
The legislation should be greeted with optimism about the powerful boost it could bring to the stock market and the economy, but it could also raise concerns about what a historically significant stimulus package could do on inflation and interest rates.
Stocks were mixed last week, with the Dow and the S&P 500 rising, but the Nasdaq was dragged down by interest rate sensitive tech names. The benchmark 10-year Treasury yield continued to push higher, revisiting its recent high of 1.61% on Friday, before trading at 1.54% at the end of the session. Yields move opposite to price.
A wildcard for stocks could be the way interest rates behave in upcoming Treasury auctions.
There is a $ 38 billion 10-year auction on Wednesday and a $ 24 billion 30-year bond auction on Thursday.
Traders are watching them closely, after a historically weak 7-year Treasury auction in February pushed rates up even for 10 years.
“We’re a little more cautious of them, given what we’ve seen in Year 7 and the Japanese selling pressure,” said Ben Jeffery, strategist in the strategy team. BMO Capital Markets US Rates.
He said Japanese institutions may be less interested in participating before their fiscal year ends on March 31.
The Senate was due to approve its version of the $ 1.9 trillion stimulus package and send it to the House for a vote within the week. Otherwise, the market is watching the main inflation reports with the consumer price index expected on Wednesday and the producer price index, expected on Friday.
“I think the markets will closely monitor the progress of the stimulus package,” said Michael Arone, chief investment strategist at State Street Global Advisors. “I think they will continue to monitor the movement of the 10-year Treasury and we will get data on the CPI. It will inform about those movements.”
He expects the stimulus to remain a factor that could influence the markets.
Inflation is a source of concern for the markets, as rising inflation could squeeze margins and undermine earnings power. For bond investors, this would reduce value and make interest payments less valuable.
“As long as the rise in Treasury yields matches the rise in inflation, I think the market will be able to handle that. I think the challenge is when the yields are significantly higher than inflation. .I like to see them closely matched, ”says Arone.
He said the market feared the next stimulus package could overheat the economy and create inflation, especially as it follows the package approved in December.
“I think that sounds like a ‘do you really need another $ 1.9 trillion?’ “We’re going to put more gas on the fire, and with that $ 1.9 trillion, that’s what the market is concerned about.”
Consumer inflation is expected to remain somewhat subdued in February, following a 1.4% year-over-year increase in the core CPI in January. But the pace of inflation is likely to pick up, especially in March and April, as comparisons with last year, when the economy was shut down, are likely to look extreme.
Choppy to continue
Policy makers expect the back-and-forth between interest rates and stocks to continue.
Rates were higher on Friday after a strong employment report in February and inventories were also higher. The economy created 379,000 jobs in February, about 160,000 more than expected.
“I don’t think 1.5%, 1.6% over 10 years is terribly embarrassing for the market,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. She said the speed of movement was disturbing.
The rotation of technology and growth to more cyclical names in the financial, energy and industrial sectors continued over the past week.
Energy rose more than 10% with oil prices, which were at an almost two-year high. Financials saw the next strongest move, gaining 4.3% for the week.
“I think we are in a phase of unstable consolidation,” Sonders said.
“You are seeing extreme historical discrepancies between what energy and finance is doing recently versus technology and consumer discretionary,” she said.
Sonders added that while the consolidation phase is about to end, it suggests there may be more downsides to some sparkling names. “The good news here is that I think the environment is getting better for active stock pickers,” she said.
The Nasdaq Composite was down more than 10% on Thursday from its February 12 high. But on Friday, the index turned around, gaining about 1.6%. This is a positive sign for the market, especially since it happened when rates rose.
The S&P 500 rose 0.8% for the week and the Dow Jones rose 1.8%. The Nasdaq, meanwhile, is down 2%.
“I think at the end of the day the better quality segments that have been impacted in technology and communications probably need reweighting in valuation,” Sonders said. “You can argue that we had micro-bubbles in the market, and they might have to suffer more from the downside.”
She said investors might wish to adjust their holdings regularly instead of waiting for schedule adjustments.
“If you get a two-three-week, four-five-day raise in a particular industry, reduce some of it,” Sonders said, nothing is the opposite of what most people do.
Calendar for the upcoming week
Earnings: Stitch Fix, Casey General Store
10 a.m. Inventory of wholesalers
Earnings: H&R Block, Navistar, Thor Industries, Dick’s Sporting Goods
6:00 a.m. NFIB Small Business Survey
1:00 p.m. 3-year $ 58 billion bill auction
Earnings: Campbell Soup, Oracle, Vera Bradley, Tupperware, United Natural Foods, Adidas, Cloudera, Bumble, Fossil, Lending Club, Express, AMC Entertainment
7:00 a.m. Mortgage applications
8:30 am CPI
1:00 p.m. 10-year $ 38 billion bill auction
2:00 p.m. Federal Budget
Earnings: Ulta Beauty, Vail Resorts, DocuSign, Poshmark, Gogo, Zumiez, JD.com, WPP, Party City
8:30 a.m. Unemployed claims
10 a.m. JOLT
1:00 p.m. 30-year $ 24 billion bond auction
8:30 am PPI
10:00 a.m. Quarterly Services Survey
10:00 a.m. Consumer sentiment