U.S. stock and bond markets had another bumpy ride last week as long-term interest rates continued to push higher on the back of robust vaccine and economic data and progress toward another round of stimulus, which was approved by the Senate over the weekend. For the week, the Dow and S&P 500 managed to post positive gains of 1.9% and 0.8%, respectively, as economically sensitive sectors like energy, industrials, and materials lifted the indices higher and offset weakness in information technology. Meanwhile, the tech-heavy Nasdaq Composite tumbled -2.1% as investors rotated out of some of the more expensive, high growth stocks in the index in favor of cyclical stocks. The 10-year U.S. Treasury yield ended the week at 1.55% compared to 1.46% a week prior with stimulus progress providing another push alongside difficulty digesting the increase in supply of U.S. government debt issuance.
The U.S. Senate officially passed the $1.9 trillion stimulus package featuring $1,400 stimulus checks, an extension of enhanced unemployment benefits through September, and $350 billion for state and local governments. The bill passed by a narrow margin after tightening eligibility requirements for the direct payments and dropping the $15 minimum wage from the House bill. It will now head back to the House where it will need to be approved before being sent to President Biden for his signature.
Friday’s payroll numbers for February provided an encouraging boost to the labor market outlook as U.S. employers added 379k jobs last month, well in excess of expectations for a 188k payroll increase, and January’s gains were revised higher to 166k jobs. The increase pushed the unemployment rate slightly lower to 6.2% from 6.3% in January. Most of the job gains during February occurred in the leisure and hospitality sector, which added 355k jobs as business restrictions have been reduced in response to the positive Covid case trends and vaccine rollout. There is still a long way to go for the leisure and hospitality sector where there are still 3.5 million fewer jobs than before the pandemic.
Despite the recent stretch of positive news on the vaccine roll-out and the economic recovery, it has been met with an uptick in volatility in stock and bond markets. The encouraging data has pushed up economic growth and inflation expectations, feeding the rise in interest rates that has let the air out of extended stock and bond valuations. Rising rates are a headwind to prices of existing bonds as new bonds issued at higher market rates become more attractive. They can also weigh on stock prices as bonds become a more attractive alternative and rising rates decrease the present value of future cash flows. However, it is important to remember that a gradual recovery and normalization in interest rates is a long-term positive for investors as it indicates a healthier outlook for corporate earnings growth and improving yields for savers and bondholders.
In the week ahead, investors will get an updated reading on inflation with the Consumer Price Index (CPI) expected to push up to 1.7% year-over-year from 1.4% last month and Producer Prices (PPI) expected to rise to 2.7% year-over-year compared to 1.7% in January. In addition to resuming consumer demand aided by stimulus, the year-over-year inflation numbers will likely pick up in the next few months as prices are compared to the economic shock from a year ago that depressed prices initially. The Federal Reserve expects this increase and an overshoot of their 2.0% inflation target would likely prove transitory, but it will be monitored closely by market participants over the course of the year.
