Traders on the trading floor of the New York Stock Exchange
Source: The New York Stock Exchange
The tug of war between equities and rising bond yields could set the tone for the coming week, especially as positive economic data continues to push up government bond yields.
Friday’s February employment report is the high point of the week’s data and an important current look at the virus’s impact on the economy, after just 49,000 jobs were added in January. According to Dow Jones, economists expect 218,000 jobs by February and the unemployment rate should remain the same at 6.3%.
Fed speakers are also a major focus of the markets, after the rapid rise in bond yields over the past week made it feel like a runaway train. Fed Chairman Jerome Powell will be the main speaker when he appears at a Wall Street Journal summit on Thursday.
“If he wants to stop this interest rate hike, he has to say something. But he runs the risk of sounding aggressive. The softer he sounds, the higher the interest,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. If the Fed is described as moderate, it means that it has simple policies such as keeping interest rates low.
Some Fed watchers doubt the central bank will respond to the interest rate hike any more than Powell did last week when he said the move was the result of a picking up economy. But bond professionals say Powell could reinforce that Fed policy will remain easy for a long time to come.
The rapid rise in interest rates this month surprised investors. The 10-year benchmark return, affecting mortgages and other loans, was 1.46% Friday afternoon, about 15 basis points or 0.15%, above the level of a week earlier. After a big hike on Thursday, 10-year yields traded 1.50% on both sides, which is the consensus on where yields would be at the end of the year, not the beginning.
The rapid rise in interest rates, rising as prices fall, has scared equity investors over the past week, as evidenced by choppy trading and a major sell-off on Thursday. The Nasdaq fell nearly 4.9% this week as technology stocks were hit the hardest, but the S&P 500 was down about 2.4% this week.
“I think it will probably be a short-lived tug of war,” said Sam Stovall, chief investment strategist at CFRA. Stocks reflected optimism about the economy, and now they are joined by bonds.
“People forget why we look at very high annual increases [economic] indicators. It’s that we’ve just entered the depths of a recession … and we’re now in many measures just above pre-pandemic levels, ”he said.
Inventories performed poorly on average in February, but this year they were higher, rising due to an improving economy, the roll-out of vaccines and the prospect of a major stimulus package. The $ 1.9 trillion stimulus package from the Biden administration should go to a vote in the Senate in the coming week.
The expected economic boost from stimulus has also boosted yields, as well as heightened concerns about inflation.
“March is actually a pretty good month for the market. It’s the fourth best in terms of average price changes. It’s the fourth best in frequency of progress, but it’s the fourth lowest in terms of volatility,” Stovall said.
The average gain in March since World War II was 1.1%. But in the 14 years like this one, when stocks were lower in January but higher in February, the S&P rose an average of 1.9% in March.
Before February, the S&P gained 2.6%, while the Nasdaq lagged with a gain of 0.9%. The Dow was up 3.2% and the Russell 2000 was up 6.1%.
Expecting a sell-off in the market, Stovall said the tech and consumer discretionary sectors were the worst over the past week as stocks sold, but they had also gained the most. Those sectors would also likely be sold more in the event of a further downturn.
“It could be sales driven by a rotation from expensive tech stocks to the smaller and less market-oriented value problems,” he said.
Jim Caron, head of global macro strategies at Morgan Stanley Investment Management, said one of the problems for the market was that the interest rate change was taking investors by surprise. “It was really the speed at which it happened that worried everyone,” he said, noting that the move last week was distinguished by the fact that it also involved shorter-term securities, such as the 5-year bond.
“In essence, the market was testing the Fed’s intention to keep interest rates low for a long time,” said Caron. “They need to make sure the markets understand that they are seriously on this course to ensure that we have a full and robust recovery, but they also don’t want to be so moderate that we suddenly charge all kinds of inflation expectations. … and this will increase the rates. “
“They want to see a rate hike for good reason,” he said.
Other data in the coming week includes ISM production data from Monday and Thursday’s unemployment claims, significant after an unexpected drop in last week’s data.
The earnings season is slowing down, but retailers will report it, with Target, Kohl’s and Nordstrom on Tuesday and Costco and BJ’s Warehouse on Thursday.
The annual CERAWeek energy conference lasts all week and includes presentations from industry peers from Saudi Aramco, Chevron, ConocoPhillips, Total, and others. The conference has been a mainstay of the oil industry for more than three decades.
Week ahead calendar
Monday
Merits: Zoom Video, MBIA, Ambac Financial, Hilton Grand Vacations, Inovio Pharma, Perrigo, Boingo Wireless, Tegna
9:00 am New York Fed President John Williams
9:05 am Fed Governor Lael Brainard
9.45 am Production PMI
10:00 am ISM production
10:00 am Construction expenditure
2:00 p.m. Atlanta Fed President Raphael Bostic
Tuesday
Sales of vehicles
Merits: Target, Box, Hewlett Packard Enterprise, Nordstrom, Ross Stores, International Game Technologies, AutoZone, Kohl’s, Abercrombie and Fitch, Hovnanian
1:00 pm Fed’s Brainard
2:00 pm San Francisco Fed President Mary Daly
Wednesday
Merits: Wendy’s, Dollar Tree, Brown-Forman, Vivendi, Splunk, Marvell Tech, Snowflake, Vroom, American Eagle Outfitters
8:15 a.m. ADP employment
9:45 am Services PMI
10:00 am Philadelphia Fed President Patrick Harker
10:00 am ISM services
12:00 p.m. Atlanta Fed’s Bostic
1:00 pm Chicago Fed President Charles Evans
2:00 pm Beige book
Thursday
Merits: Broadcom, Costco, BJ’s Wholesale, Gap, Burlington Stores, Ciena, Michael’s Cos, IMAX, Kroger, Cooper Cos
8.30 am First unemployment claims
8:30 a.m. Productivity and costs
10:00 am Factory orders
12:05 p.m. Fed Chairman Jerome Powell
Friday
Merits: Big parties
8:30 am Employment
8.30 am International trade
3 p.m. Consumer credit
3:00 p.m. Atlanta Fed’s Bostic