Investors keeping a watchful eye on rising bond yields
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — March 1, 2021
Bond yields rose for the fourth straight week. The ten-year note rose seven basis points to end the week at 1.40 percent, bringing the four-week cumulative increase to 34 basis points. At one point on Thursday the yield moved above 1.55 percent. At the same time, the January year-over-year increase in the consumer price index was level with December at 1.4 percent. The resulting real, or inflation-adjusted cost of money is moving higher in anticipation of accelerating economic activity. Reinforcing that assessment, on Saturday the House passed and sent to the Senate the President’s $1.9 trillion stimulus package. Also last week, Fed Chairman Powell testified before Congress that the Fed remains committed to its accommodative policy with the economic recovery remaining, “uneven and far from complete.”
Stocks took note of the move in bonds, moving lower for the second straight week for the first time since just before the election. The S&P 500® index slid 2.4 percent, bringing the two-week pullback from its record close to a modest 3.1 percent. The index did, however, manage to remain slightly above its 50-day moving average at the close on Friday. The primary weakness was once again concentrated in the growth sectors of the market, whose valuations are among the most negatively impacted by higher rates. Utilities suffered as well. Conversely, cyclical stocks generally outperformed. Energy stocks climbed sharply as the XLE energy ETF climbed 4.3 percent, leaving it higher on the year by 27 percent. Domestic crude oil rose $2.26 a barrel to $61.50. Since the start of the year, oil has risen $13 a barrel, for the same 27 percent increase. Financials and industrials held up relatively well, although both lost ground. The Nasdaq Composite fell 4.9 percent, bringing its two week decline to 6.4 percent. It closed on Friday just below its 50-day moving average.
The economy is showing signs of strength; Q4 earnings reveal a turnaround
Last week’s economic data also reinforced the assessment that the economy is firming. Owing to the December stimulus bill, personal income rose by a stunning 10 percent in January, resulting in a 20.5 percent savings rate, positioning the consumer to potentially spend strongly as the economy reopens. It is estimated that the $1,400 stimulus checks targeted in the current stimulus bill would result in an even stronger 20 percent increase in personal income in March. Also firming last week were durable goods orders, leading indicators, new home sales, home prices, consumer confidence and jobless claims. And according to Bloomberg’s Vaccine Tracker, 75 million doses have now been administered in the U.S., including an average of 1.74 million doses a day last week, with a high of 2.4 million on Sunday, February 28. That is up from a seven-day average of 0.9 million and a daily total of 1.5 million on January 20.
With fourth quarter earnings season winding down, Factset now projects a final estimated growth rate of 3.9 percent for the quarter, a dramatic turnaround from the more than 9.4 percent decline anticipated as the quarter ended. For all of 2020, earnings are anticipated to have declined by 11.2 percent. That compares to an expected decline of 17.8 percent on May 1. Earnings are forecast to grow 23.9 percent in 2021. The combination of rising earnings expectations and the recent modest pullback in the S&P 500 has resulted in a slight decline in the forward P/E ratio of the index to 21.5X from 22.5X at the start of the year.
Stock investors paying attention to drama in the bond market
The primary concern for stocks now is whether the rise in bond yields is ready to pause or has further to run. Last Friday, the yield on the ten-year Treasury declined 11 basis points, pulling back from its Thursday high. In early trading on Monday, it is yielding 1.43 percent. It remains to be seen if this represents a new range, albeit at a higher plateau than just a couple of weeks ago. If that turns out to be the case, stocks can focus on the expected powerful growth ahead and resume their uptrend. However, if yields continue to climb uninterruptedly, stocks may continue to struggle. If economic growth returns as forecast, it would not come as a surprise if bond yields rise somewhat further in the months ahead. But that should not be a problem for stocks if such an increase happens at a measured pace.
The February jobs report headlines this week’s economic calendar and is expected to show an increase of 180,000 new non-farm jobs, the strongest growth in three months. But the unemployment rate is expected to rise slightly to 6.4 percent, a primary focus of the Federal Reserve. Also, on this week’s calendar are construction spending for January, ISM PMI reports for February, and vehicle sales. Last week in Asia, China reported a slight moderation in both its manufacturing and service sector PMIs, as the coronavirus continues to be a concern, and the country slows due to the extended new year holiday. India returned to growth in the fourth quarter after two quarters of sharp declines. The MSCI Asia ex-Japan index fell 6.2 percent in dollar terms last week. Despite a rise in sentiment indicators in the Eurozone, the EuroStoxx 50 index fell 1.7 percent in dollars. In the U.K. the FTSE 100 slid 1.7 percent. However, stocks in most foreign markets are rising to start the new week, and U.S. futures are pointing to a higher open.
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
The flash reading of PMI is an estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, based on about 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.
The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. The PMI is based on a monthly survey of supply chain managers across 19 industries, covering both upstream and downstream activity. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.
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A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
A consumer price index (CPI) measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. The annual percentage change in a CPI is used as a measure of inflation.
The 10 year breakeven rate measures the difference or gap between 10 year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The 10 year breakeven rate serves as an indication of the markets’ inflation expectations over the 10 year horizon.
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Personal consumption expenditures (PCE) are a measure of the outlays or how much consumers are spending. The PCE reading is released monthly by the Bureau of Economic Analysis.
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