Traders on the floor of the New York Stock Exchange
Source: New York Stock Exchange
The tug of war between equities and rising bond yields could set the tone for the coming week, especially if positive economic data continues to push Treasury yields higher.
Friday’s February employment report is the highlight of the week’s data and an important current look at the impact of the virus on the economy, after just 49,000 jobs were added in January. For February, economists expect to see 218,000 jobs added, and the unemployment rate should remain the same at 6.3%, according to Dow Jones.
Speakers from the Fed are also a major focus of the markets, after the rapid rise in bond yields last week had the feeling of a runaway train. Fed Chairman Jerome Powell is the most important speaker, when he appears at a Wall street journal summit on Thursday.
“If you want to stop this rate hike, you have to say something. But you risk sounding aggressive. The more moderate it sounds, the higher rates will go up,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. When the Fed describes itself as moderate, it means that it maintains an easy policy, such as keeping interest rates low.
Some Fed watchers doubt the central bank will comment on rising yields, and neither did Powell last week when he said the move was the result of a stronger economy. But bond professionals say Powell could reinforce that Fed policy will remain easy for a long time.
The rapid rise in interest rates this month took investors by surprise. The 10-year benchmark yield, which influences mortgages and other loans, stood at 1.46% on Friday afternoon, about 15 basis points. [0.15%] above the level it had a week before. After a big increase on Thursday, the 10-year yield traded on both sides of 1.50%, which is the consensus view of where the returns would be at the end of the year, not at the beginning.
The rapid upward movement of yields, which rise when prices fall, spooked equity investors last week, evidenced by choppy trading and a big selloff on Thursday. The Nasdaq fell nearly 4.9% for the week, as tech stocks were hit the hardest, but the S&P 500 fell 2.4% for the week.
“I think it will probably be a tug of war in the short term,” said Sam Stovall, CFRA chief investment strategist. Stocks have been reflecting optimism about the economy, and now bonds are joining them.
“People forget why we are seeing very high year-on-year increases in [economic] indicators. It’s that we were entering the depths of the recession … and now, in many ways, we are returning to pre-pandemic levels, “he said.
Stocks on average have performed poorly in February, but this year they were higher, driven by an improving economy, the launch of vaccines and the prospect of a large stimulus package. The Biden administration’s $ 1.9 trillion stimulus package is due to go to a Senate vote next week.
The expected economic boost from the stimulus has also driven yields higher, and has also raised concerns about inflation.
“March is actually a pretty good month for the market. It is the fourth best in terms of average price change. It is the fourth best in advance frequency, however it is the fourth lowest in terms of volatility,” Stovall said. .
The average gain in March since World War II was 1.1%. But in the 14 years as well, when stocks fell in January but rose in February, the S&P was up 1.9% on average in March.
For February, the S&P gained 2.6%, while the Nasdaq lagged with a 0.9% gain. The Dow Jones was up 3.2% and the Russell 2000 was up 6.1%.
Stovall, who was expecting a sell-off in the market, said technology and consumer discretionary fared the worst last week, when the stock was selling, but had also gained more. Those sectors are likely to sell more in any other pullbacks as well.
“The sale could be driven by a turnover of expensive technology stocks to the smaller, less market-driving value issues,” he said.
Jim Caron, head of global macro strategy at Morgan Stanley Investment Management, said a problem for the market was that the rate move took investors by surprise. “It was really the speed at which it happened that worried everyone.” he said, noting that last week’s move was distinguished by the fact that it was also in shorter duration securities, such as the 5-year note.
“Basically, the market was testing the Fed’s determination to keep rates low for a long time,” Caron said. “They have to make sure the markets understand that they are seriously on this course to make sure we get a full and strong recovery, but they also don’t want to be so dovish that we suddenly put a price on all kinds of inflation expectations. … and the rates go up just with that. “
“They want to see rates increase for good reason,” he said.
Other data for next week include Monday’s ISM manufacturing data and Thursday’s jobless claims, important after an unexpected drop in last week’s data.
Earning season is coming to an end, but retailers will report, with Target, Kohl’s and Nordstrom on Tuesday, and Costco and BJ’s Warehouse on Thursday.
The annual CERAWeek energy conference takes place throughout the week and includes presentations from industry officials from Saudi Aramco, Chevron, ConocoPhillips, Total and others. The conference has been a mainstay for the oil industry for more than three decades.
Next week’s calendar
Profits: Zoom Video, MBIA, Ambac Financial, Hilton Grand Vacations, Inovio Pharma, Perrigo, Boingo Wireless, Tegna
9:00 am New York Fed President John Williams
9:05 am Fed Governor Lael Brainard
9:45 am PMI manufacturing
10:00 am ISM Manufacturing
10:00 am Construction expenditure
2:00 pm Atlanta Fed President Raphael Bostic
Profits: Target, Box, Hewlett Packard Enterprise, Nordstrom, Ross Stores, International Game Technologies, AutoZone Kohl’s, Abercrombie and Fitch, Hovnanian
1:00 pm Fed Governor Lael Brainard
2:00 pm San Francisco Fed President Mary Daly
Profits: Wendys, Dollar Tree, Brown-Forman, Vivendi, Splunk, Marvell Tech, Snowflake, Vroom, American Eagle Outfitters
8:15 am ADP employment
9:45 am PMI services
10:00 am Patrick Harker, President of the Philadelphia Fed
10:00 am ISM Services
12:00 pm Atlanta Fed President Raphael Bostic
1:00 pm Chicago Fed President Charles Evans
2:00 pm Beige book
Profits: Broadcom, Costco, BJ’s Wholesale, Gap, Burlington Stores, Ciena, Michael’s Cos, IMAX, Kroger, Cooper Cos
8:30 am Initial unemployment claims
8:30 am Productivity and costs
10:00 am Factory orders
12:05 pm Fed Chairman Jerome Powell
Profits: Large lots
8:30 am Employment
8:30 am International trade
3:00 pm Consumer Credit
3:00 pm Atlanta Fed Bostic