Texas-size reopening
Forget the hyped-up headline: Texas is truly reopening, along with Mississippi. No restrictions, no masks, no capacity limitations. This is what it was like exactly one year ago, remember? There were immediate concerns from some that these measures were premature and irresponsible, with President Joe Biden referring to the move as “Neanderthal thinking” on the part of these states.
Regardless of the differing points of view, the major hurdle to returning to a fully functioning economy has been the various restrictions that have been in place since last year. Infections, hospitalizations and deaths have all dramatically declined in the past month, vaccine delivery is ramping up and warmer weather allows people to get outside and spread out. If we don’t reopen now, when can we?
The market seemed to embrace reopening news as it wrestled with the riptide of rising rates. Interest rates have been steadily climbing in recent weeks, and 30-year mortgage rates rose above 3% for the first time since June. We had a strong start to the week as the 10-year U.S. Treasury dipped just under the psychological 1.5% level, but markets stumbled badly on Federal Reserve Chairman Jerome Powell’s comments on Thursday. February’s strong jobs number on Friday helped right the ship for the time being. (More on that below).
Powell’s comments trigger sell-off
Chairman Powell said the Fed would be patient with inflation, which spooked the market and triggered a large sell-off on Thursday as the 10-year hopped back over 1.5%. The S&P 500 and Nasdaq turned negative year-to-date on Thursday after Powell’s comments before regaining their balance on Friday.
Expectations for more accommodation were not forthcoming and left the market with the inescapable conclusion that interest rates will go up regardless. In either case, if we have inflation or if the Fed steps in to try to control inflation, rates will go up. As we reopen, the flood of money that has been pumped into the economy will likely put a pinch on supply, and prices will rise to restore equilibrium. That’s one symptom of inflation.
In addition, lower rates will fuel more borrowing to buy higher-priced goods until lenders begin demanding higher interest rates to allow debt-strapped borrowers to access funds. Eventually, there will be less borrowing at the higher rates; less money flying around will mitigate price increases and restore the balance. That’s the basic economic concept of the market controlling rates.
Alternatively, the Fed can get preemptive and begin to raise rates in anticipation of inflationary pressure. But that risks the health of the economy and won’t be popular with the stock market. That’s why I think rates will rise, and it’s just a question of how much and how fast.
Something for everybody by May!
President Biden announced last week that there will be enough vaccine on hand for everyone by May. I don’t mean to be repetitive, but if we have the vaccines and the economy is set to reopen, why are we hamstringing future growth by adding to our already huge debt burden? In my opinion, getting things back to normal is not predicated on another massive stimulus. Which leads me to where the current stimulus proposal stands. …
Too much stimu-less?
The massive stimulus mentioned above cleared the Senate late last week and now goes back to the House to vote on the Senate version of the bill. Payments of $1,400 will be sent to individuals making $80,000 or less, and the amount will decrease and phase out for people making over that amount. The income amounts are double for couples filing jointly.
Depending on who you ask, you’ll get various answers about where the money is going. Some say about 1% is going to vaccine spending and only 10% of the $1.9 trillion package is going toward virus-related projects. Others say 85% of the funds have a virus connection. It’s all in the eye of the beholder.
The concern is this: With the economy reopening, is all this “coronavirus related” spending going to be helpful? It’s hard to tell. If we see the expected growth, will additional stimulus create inflationary pressures on an economy that may not need it? It seems that markets have baked in the stimulus as a done deal and the stimulus trade is all but done. It remains uncertain what the fallout will look like once the money starts being spread around.
Jobs and data
Job growth surpassed expectations on Friday after the ADP number created some concern on Wednesday. Expectations were for an increase of 210,000 jobs and unemployment to remain steady at 6.3%. Instead, Friday’s job report clocked in at more than 379,000, and the prior two months were also revised upward. The unemployment rate dropped slightly to 6.2%.
These are super numbers, despite the elevated weekly claims, which show no signs of abatement. It’s great news as we begin to reopen; if this momentum can continue and the Fed and current administration can avoid major policy mistakes, we could manage to get the economy back to firing on all cylinders – but that’s a lot of moving parts. Economic data was good this week, but the signs say that the economy isn’t even close to its prior strength just yet.
Coming this Week
  • Data is pretty thin this week. The only major information we’ll see is CPI (an inflation indicator) on Wednesday and Consumer Sentiment on Friday.
  • I’ll be watching the 10-year U.S. Treasury note auction on Wednesday afternoon. Remember, the lack of interest in the 7-year auction the prior week spiked rates and drove markets down as we ended February.
  • Unemployment, unemployment, unemployment. New claims on Thursday need to come down for things to get better.
Have a great week!
Tom Siomades
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