U.S. equity markets surged higher last week lifted by improving U.S. economic growth expectations as President Biden officially signed off on the $1.9 trillion stimulus package on Thursday and reiterated that every adult citizen will be eligible to receive a Covid-19 vaccine by May 1st. Over 21% of Americans have received at least one dose to date. New data also showed improving labor market conditions as consumer demand picks back up. For the week, the S&P 500 and Dow Jones posted new record highs after gaining 2.7% and 4.2%, respectively. Meanwhile, the Nasdaq Composite also notched a solid 3.1% gain, but remained over 5% off its high as investors continued to rotate out of last year’s winning high-growth technology stocks into cyclical stocks more poised to benefit from the reopening. Interest rates made another move higher following the stimulus approval with the 10-year Treasury ending the week at 1.63% compared to 1.55% a week ago as investors have broadly trimmed back government bond exposure this year in favor of riskier assets like stocks.
Another round of positive economic data last week showed that the recovery in the U.S. remains on firm footing with the U.S. consumer supported by stimulus and a healing labor market. The Job Openings and Labor Turnover Survey indicated that new job openings well surpassed expectations to kick off the year in January with over 6.9 million openings compared to the consensus forecast of 6.5 million. The increase in employment opportunities is showing up in the number of continuing unemployment claims, which maintained its steady decline in last week’s report falling by 223k to 4.1 million. Consumer sentiment also rose higher in early March to its highest level in a year due to the brightening job prospects and vaccine data, according a survey from the University of Michigan. With the domestic consumer supplying about 70% of U.S. economic growth, these indicators provide an encouraging picture.
Meanwhile, despite resuming demand and stimulus support, last week’s inflation readings rose but came in softer than anticipated once again. Consumer Prices rose 1.7% year-over-year in February, while Producer Prices came in higher at a 2.8% year-over-year increase. These figures are expected to tick higher in the short-term as we lap last year’s economic shock that initially dropped prices lower and as reopening continues with unprecedented stimulus support behind consumers. The level of expansion of the money supply following stimulus has stoked growing fears of run-away inflation. However, the Federal Reserve has pushed back on these concerns stating that sustainable broad-based inflation increases have historically accompanied tight labor markets where rising wage demands force businesses to increase prices to prevent falling profitability. Today we are far way off from a tight labor market as the U.S. economy employs 8.5 million fewer people than it did before the pandemic, a loss which may take years to reabsorb to get back to full employment.
In the week ahead, the Federal Reserve will once again be in the spotlight following its March meeting that comes amid the backdrop of a continued rise in long-term interest rates. Fed Chairman Jerome Powell has indicated that the central bank is comfortable with an orderly normalization in rates as long as rates don’t rise too quickly, which would threaten to constrain the recovery as borrowing costs become more restrictive. The Fed is expected to remain accommodative for the foreseeable future as letting the labor market heal remains the core focus. However, market participants will be paying close attention to the Fed’s comments around its expected timeline for withdrawing support by tapering bond purchases and its forecast of eventual rate hikes.
