- Weekly global market focus
- 10-year T-note yield surges to new 13-month high
- Pandemic infection rates continue to slowly improve
Weekly global market focus — The U.S. markets this week will focus on (1) whether Fed Chair Powell at his press conference after the Tue/Wed FOMC meeting continues to say that he is only opposed to “disorderly” yield rises, (2) whether the U.S. stock market can continue to shake off higher yields after the 10-year T-note yield last Friday rose sharply to a new 13-month high of 1.64%, (3) the Treasury’s sale of 20-year T-bonds on Tuesday and 10-year TIPS on Thursday, (4) the outlook for the economy as consumers will start receiving $1,400 stimulus checks this week, and (5) any comments by the White House on its ideas for a new infrastructure and clean energy spending bill.
In Europe, the markets today will react to the poor showing by Chancellor Merkel’s CDU party in the weekend elections in two German states. The markets are also carefully watching the pandemic situation in Europe as Paris may be headed for another lockdown as ICU beds fill up and as Ireland halted AstraZeneca vaccines. The markets will also be watching European bond yields after the ECB said last week it would step up purchases under its PEPP QE program to prevent yields from rising. The Bank of England, at its policy meeting on Thursday, is expected to leave its policy unchanged.
In Asia, the BOJ at its meeting late this week is expected to leave its key policy variables unchanged but may push back harder on the recent upward pressure on 10-year JGB yields.
In China, the focus is on the recent -10.8% downward correction in the Shanghai Composite index from its mid-February 5-1/2 year high, although the index was able to rebound mildly higher later last week. Chinese stocks this week could show renewed weakness as state-connected funds may not be buying stocks as they were during last week’s National People’s Congress, which is now over.
10-year T-note yield surges to new 13-month high — The 10-year T-note yield last Friday surged to a new 13-month high of 1.64% and closed the day sharply higher by +9 bp at 1.62%. The 10-year yield this year has now risen by a net +71 bp from the end-2020 level of 0.91%.
That yield surge has been caused by expectations for the U.S. economy to run hot this year and for inflation to increase as the pandemic ends and as the economy gets a big boost from the total of $2.8 trillion of stimulus seen so far this year. The 10-year breakeven inflation expectations rate last Friday initially jumped to a 7-year high of 2.30%, although it fell back and finished the day down -2 bp at 2.26%.
T-notes prices last Friday were also under pressure on signs of heavy liquidation of Treasury holdings by bond dealers ahead of a regulatory deadline. Federal Reserve data released late Thursday showed Treasury holdings at primary dealers dropped by a record $64.7 billion to $185.8 billion in the week through March 3, the lowest in 3 years.
Bond dealers and banks may be liquidating their Treasury holdings before the expiration of a regulatory exemption on March 31. Since April 2020, when the Fed instituted some of its pandemic crisis measures, banks have been allowed to exclude Treasuries and reserves when calculating their supplementary leverage ratio. This allowed them to hold more Treasuries than they otherwise may have done. BMO Capital Markets estimates that unless the exemption is extended past March 31, there could be an additional $200 billion of Treasury bond selling.
The S&P 500 index last week was able to more than recover from the early-March sell-off and closed the week up +2.64%. The S&P 500 index rallied to a new record high last Thursday but then fell back on Friday as the 10-year T-note yield surged to a new 13-month high. The Nasdaq 100 index last week was able to close +2.12% as it recovers modestly from the downside correction seen from mid-February through early March.
Pandemic infection rates continue to slowly improve — Covid infection rates continue to slowly improve. The 7-day average of new daily Covid infections on Saturday edged to a new 5-month low of 52,227. The 7-day average of daily Covid deaths fell to a 3-3/4 month low of 1,371 last Friday but then moved higher to 1,424 on Saturday.
Despite the continued decline in the Covid infection rates, Dr. Fauci has warned repeatedly in the past week that a new Covid wave is possible due to variants and states that are letting down their guard. He also expressed concern about people who are resisting vaccines and encouraged all eligible Americans to get the vaccine. However, he also said that he has a “great degree of confidence” that pandemic guidelines can be loosened by July 4.
The vaccination outlook took a favorable turn last week after President Biden said that he wants all states to make all adults eligible for a vaccine by May 1, and suggested that the country could begin to return to normal by July 4.
According to Bloomberg’s vaccine tracker, 107 million vaccine doses have so far been given in the United States. Last week, an average of 2.39 million doses per day were given, amounting to 0.7% of the total U.S. population being vaccinated every day.
Bloomberg reports that 21.0% of the U.S. population has received one vaccination dose, and 11.3% have been fully vaccinated, which means a total of 32% of the U.S. population has at least some immunity from a vaccine dose. That means that more than 40% of the U.S. population has some degree of Covid immunity after taking into account people who have recovered from Covid and have some antibodies.
