Stocks are facing higher interest rates and fiscal stimulus in the coming week ahead of the cross-stream

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.

Stimulus came

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

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

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