Traders on the floor of the New York Stock Exchange
Source: The New York Stock Exchange
The Covid-19 aid package is on track for final congressional approval in the coming week – and it could be a double-edged sword for markets.
The legislation should be greeted by optimism about the sharp rise it could bring to the stock market and the economy, but it could also be concerned about what a historically large stimulus package could mean for inflation and interest rates.
Stocks were mixed last week, with the Dow and S&P 500 higher, but the Nasdaq was dragged lower by interest rate sensitive technology names. The standard ten-year treasury yield continued to push higher and reconsidered the recent high of 1.61% on Friday, before trading at 1.54% in the late trading session. Yields move opposite price.
One game card for equities could be how interest rates behave around the upcoming auctions of the treasury.
There is a $ 38 billion ten-year auction on Wednesday and a $ 24 billion 30-year auction on Thursday.
Traders are keeping a close eye on it, after a historically weak 7-year treasury auction sent higher rates in February, even for the ten years.
“We’re a little bit more cautious about it, just given what we’ve seen in the last 7 years and some Japanese sales pressure,” said Ben Jeffery, strategist for BMO Capital Markets’ US tariff strategy team.
He said Japanese institutions may be less interested in participating before the end of their fiscal year on March 31.
The The Senate on Saturday approved a $ 1.9 billion stimulus package, which is expected to go to the House on Tuesday for a vote. Otherwise, the market is watching the major inflation reports with the consumer price index expected on Wednesday and the producer price index, which is planned for Friday.
“I think the markets will be keeping a close eye on the progress of the stimulus package,” said Michael Arone, chief investment strategist at State Street Global Advisors. “I think they will continue to monitor the treasury move after ten years and we are going to get CPI data. It will inform information about the moves.”
He expects stimulus to remain a factor that could affect markets.
Inflation has been of concern to markets as rising inflation could crush margins and hamper earnings. For bond investors, this would erode value and make interest payments less valuable.
“As long as the increase in treasury yields matches the increase in inflation, I think the market will be able to handle it. I think the challenge is that the yields are significantly higher than inflation … I like to fit it well, says Arone.
He said the market is worried that the next stimulus package could overheat the economy and create inflation, especially as it gets on the heels of the package approved in December.
“I think it’s in need of another $ 1.9 billion?” Arone said: “We’re going to throw more gas on the fire, and with that $ 1.9 billion, that’s what the market is concerned about.”
Consumer inflation is expected to remain somewhat subdued for February, following the 1.4% year-on-year rise in the core CPI in January. But the inflation rate is likely to increase, especially in March and April, as comparisons with last year, when the economy closed, are likely to look extreme.
Choppy to continue
Strategists expect the push between interest rates and equities to continue.
On Friday, rates were higher after a strong report on jobs in February and stocks were also higher. The economy added 379,000 jobs in February, about 160,000 more than expected.
“I do not think 1.5% and 1.6% on the ten years are terribly troublesome for the market,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. She said the speed of the move is worrying.
The exchange of technology and growth for more cyclical names in the financial, energy and industrial sectors has continued over the past week.
Energy rose by more than 10% with oil prices high for almost two years. Financials took the next strongest step, with 4.3% for the week.
“I think we’re in a sharp consolidation phase,” Sonders said.
“You see some extreme historical spreads between what energy and finance have been doing recently towards technical and discretionary consumers,” she said.
Sonders added that even though the consolidation phase is almost at the end, it suggests that there may be more disadvantages for some frothy names. “I think the good news here is a better environment for active stock voters,” she said.
The Nasdaq composite has fallen more than 10% since Thursday from February 12th. But on Friday, the index reversed and rose by about 1.6%. This is a positive sign for the market, especially since it happened when rates moved higher.
The S&P 500 rose 0.8% for the week, and the Dow 1.8%. The Nasdaq, meanwhile, fell 2%.
“I think ultimately the higher quality segments hit in technology and communications probably needed to be valued to weigh a valuation,” Sonders said. “It’s likely that we’ve had some microbubbles in the market, and that it might need to be more detrimental.”
She said investors may want to adjust the allocation of their shares regularly instead of waiting for adjustments around the calendar.
“If you get a two-three-week, four-five-day boom in a particular sector, you have to back some up,” Sonders said. It is nothing different from most people.
Week calendar in advance
Earnings: Stitch Fix, Casey’s general store
10: am Wholesale Stock
Earnings: H&R Block, Navistar, Thor Industries, Dick’s Sporting Goods
06:00 NFIB Small Business Survey
13:00 $ 3 billion note auction for three years
Earnings: Campbell Soup, Oracle, Vera Bradley, Tupperware, United Natural Foods, Adidas, Cloudera, Bumble, Fossil, Lending Club, Express, AMC Entertainment
07:00 Mortgage Applications
13:00 $ 10 billion auction for ten year notes
14:00 Federal budget
Earnings: Ulta Beauty, Vail Resorts, DocuSign, Poshmark, Gogo, Zumiez, JD.com, WPP, Party City
8:30 a.m. Unemployed claims
10:00 am JOLTs
13:00 $ 30 billion bond auction
10:00 Quarterly survey
10:00 Consumer sentiment