Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
Most major U.S. equity benchmarks ended lower for a second straight week, while Treasury yields surged. The tech-heavy Nasdaq Composite dropped 4.8% in total return for the week, while the S&P 500 fell 1.9%, and the Dow Jones Industrial Average lost 1.3%. Equities still managed to post gains for the month of February, with the S&P 500 Index ending the month up 2.8% in total return. The 10-year and 30-year U.S. Treasury yields hit their highest levels in more than a year on Thursday, and at one point the yield curve, or the spread between the 2-year and 10-year yields widened to its largest margin since 2015. Rates pulled back somewhat on Friday with the 10-year U.S. Treasury and 2-year U.S. Treasury notes ending the week at 1.40% and 0.13%, respectively. The ongoing bear market in bonds may be driven by increasing inflation expectations amid a strong macroeconomic environment, solid corporate earnings, improving COVID-19 trends and expectations for more fiscal stimulus. Gold finished the week at $1,734/ounce, down 2.8% for the week. And West Texas Intermediate Crude Oil ended the week at $61.50/barrel, up 3.8% for the week.
Investors’ attention last week was focused on the bond market, with U.S. Treasuries continuing to sell off and rising yields putting pressure on equities. One of the results was a significant pro-cyclical rotation, with growth and momentum names continuing to come under scrutiny given stretched valuations. Growth sectors saw some recovery late in the week, which was consistent with their strong fundamental backdrop. Additionally, the bullish narrative anchored to the big picture themes of massive global monetary and fiscal stimulus, low interest rates, modest inflation, vaccine progress, and broad economic and company specific fundamental data that continues to improve, appear to remain in place.
While financial markets were volatile last week, several positive news items received attention. Last week saw a total of more than 46 million Americans who have now received at least one dose of COVID-19 vaccine, which may now be contributing to the continued sharp decline in new cases and hospitalizations. Johnson & Johnson's single-dose vaccine was ruled safe and effective by U.S. regulators and was approved for emergency use over the weekend. House Democrats approved a $1.9 trillion stimulus package late Friday and sent it to the Senate for debate. Analysts expect the final bill will be at least $1.5 trillion and will be passed before unemployment benefits expire in mid-March. Also last week, Fed Chair Jerome Powell delivered his semi-annual testimony to Congress last week where he emphasized that the economy remains a long way from the Fed's labor-market and inflation goals and that it will take some time before "substantial further progress" towards those goals will be seen. Powell noted that recent higher yields represent a statement of confidence about the economic trajectory and reiterated that, while the recovery could bring transitory price pressures, he does not expect to see inflation rising to troubling levels.
Last week was a busy one on the domestic economic calendar. Housing data remained largely upbeat, with new home sales jumping 4.3% in January, following a sharp revision higher in December. Weekly jobless claims data improved. Applications for U.S. state unemployment benefits fell by more than forecast to the lowest since November, a sign that job cuts may be starting to slow along with COVID-19 infections and an acceleration in vaccinations. The second read on fourth quarter economic growth came in at a 4.1% annualized growth rate, slightly higher than the initial read for 4.0%. Lastly, U.S. personal incomes surged by 10% in January amid another round of stimulus checks. And this helped boost spending, which advanced by the most in seven months.
In the week ahead, investors will continue to hear from Fed officials throughout the week at a variety of speaking events. The domestic economic calendar is full as markets will digest ISM PMIs (Institute for Supply Management purchasing managers’ index), weekly jobless claims, factory orders, and the monthly BLS (Bureau of Labor Statistics) report, among others. The February employment report will provide insight into the speed and direction of the labor market recovery.
As always, we’ll be watching and reporting back to you next week. Thank you.