- S&P 500 rallies to record high on fiscal stimulus optimism and increased ECB bond-buying
- ECB boosts QE buying to cap bond yields
- 10-year breakeven rate reaches 7-1/4 year high and U.S. PPI expected to jump to +2.7% y/y
- U.S. consumer sentiment expected to improve
S&P 500 rallies to record high on fiscal stimulus optimism and increased ECB bond-buying — The S&P 500 index and the Dow Jones Industrials index on Thursday both rallied to new record highs and closed higher. SPX closed up +1.04%, and the DJIA closed up +0.58%. The Nasdaq 100 index closed the day sharply higher by +2.36%, but would need to rally by another +6.3% to match its mid-February record high.
The stock market was pleased that President Biden signed the $1.9 trillion pandemic aid bill on Thursday, a day earlier than expected. The White House said the bill was ready, so Mr. Biden went ahead and signed it. President Biden will still hold a signing ceremony with Congressional leaders today. Mr. Biden and White House officials will hold events next week, highlighting the passage of the bill.
The $1.9 trillion pandemic aid bill comes close on the heels of the $900 aid bill that Congress passed in late December 2020. The new $1.9 billion aid bill will give the U.S. economy a strong new shot in the arm. Many consumers will be spending their new $1,400 stimulus checks, and extra unemployment benefits have been extended until September. The bill contains a host of spending measures, including aid to state and local governments and increased aid for vaccines and pandemic measures.
The markets are already looking ahead to another big stimulus bill later this year when Democrats formulate their infrastructure bill, which is likely to attract a host of spending measures on clean energy and other legislative priorities.
Also stimulating the economy will be increased spending by consumers from their cash-stockpile built up during the pandemic. As the pandemic infection numbers fall and the vaccination rates rise, more people will be venturing out to spend money on restaurants, entertainment, and travel, thus giving the U.S. economy a further boost.
There was also fresh vaccine optimism on Thursday after it was reported later in the afternoon that President Biden, in his speech Thursday night, would direct the states to make all adults eligible for a vaccine by May 1.
According to Bloomberg’s vaccine tracker, 98.2 million vaccine doses have so far been given in the United States. Last week, an average of 2.23 million doses per day were given, amounting to 0.7% of the total U.S. population being vaccinated every day. Bloomberg reports that 19.3% of the U.S. population has received one vaccination dose, and 10.2% have been fully vaccinated, which means a total of 30% of the U.S. population has at least some immunity from a vaccine dose.
The 7-day average of new daily Covid infections on Wednesday fell to a new 4-3/4 month low of 56,105, while the 7-day average of daily Covid deaths fell to a 3-1/4 month low of 1,551.
ECB boosts QE buying to cap bond yields — The ECB at its policy meeting yesterday said that its bond purchases in Q2 will be “conducted at a significantly higher pace than during the first months of this year.”
ECB President Lagarde said in her press conference, “Increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy. This is undesirable.”
The ECB yesterday put a clear stamp on its determination to push back on the markets and cap the +24 bp rise that has been seen so far this year in the 10-year German bund yield to the current level of -0.33%. The 10-year bund yield yesterday closed -2 bp at -0.33% on the QE news.
The ECB, at this point, is only front-loading its buying under its Pandemic Emergency Purchase Program (PEPP). The ECB is not promising to increase the overall size of that program, which is currently due to run until at least until March 2022. The ECB still has about 1 trillion euros of firepower left in that 1.85 trillion euro program, which means it is far too early for the ECB to announce an increase in its size or an extension of its expiration date.
10-year breakeven rate reaches 7-1/4 year high and U.S. PPI expected to jump to +2.7% y/y — The 10-year breakeven inflation expectations rate on Thursday rose to a new 7-1/4 year high and closed the day up +2 bp at 2.29%. The breakeven rate has risen sharply since late-2020 due to the emergence of effective vaccines and the massive amount of fiscal stimulus.
Today’s Feb final-demand PPI report is expected to jump to +2.7% y/y from +1.7% in January, partially because of the lower year-earlier base caused by the beginning of the pandemic. Today’s Feb core PPI is expected to jump to +2.6% y/y from Jan’s +2.0%.
U.S. consumer sentiment expected to improve — The consensus is for today’s preliminary-March University of Michigan U.S. consumer sentiment index to show a +1.7 point increase to 78.5, reversing most of February’s -2.2 point decline to 76.8.
U.S. consumer sentiment should improve significantly in the coming months as the pandemic starts to end and life begins to return to normal. Consumers have a large cash-stockpile built up from the pandemic, and they could go on a spending spree later this year once the coast is clear. Also, many Americans will be getting another stimulus check of $1400 within the next few weeks, which will undoubtedly give consumer sentiment a boost.
