Traders on the floor of the New York Stock Exchange
Source: The New York Stock Exchange
The tug of war between equities and rising bond yields could set the tone next week, especially as positive economic data continues to boost treasury yields.
Friday’s report on employment in February is the highlight of the week’s data and an important current look at the impact of the virus on the economy, after only 49,000 jobs were added in January. For February, economists expect 218,000 jobs to be added, and the unemployment rate should remain the same, at 6.3%, according to Dow Jones.
Fed speakers are also a major focal point in the markets, after the rapid rise in yields over the past week felt like a runaway train. Fed Chairman Jerome Powell is the keynote speaker when he appears at a Wall Street Journal summit on Thursday.
“If he wants to stop this rise in rates, he has to say something. But he runs the risk of sounding hawkies. The more pigeon he sounds, the higher it will go,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. When the Fed is described as a pigeon, it means that it maintains an easy policy, such as keeping interest rates low.
Some Fed viewers doubt the central bank will comment more on the rise in yields than Powell did last week, when he said the move was the result of a strengthening economy. But bondholders say Powell could bolster that Fed policy will remain easy for a long time to come.
The rapid rate hike this month has surprised investors. The standard ten-year yield, which affects mortgage lending and other lending, was 1.46%, about 15 basis points, or 0.15%, above the level just a week earlier on Friday afternoon. After a major surge on Thursday, the ten-year yield on both sides traded at 1.50%, which is the consensus of where the returns would be at the end of the year, not the beginning.
The rapid upward rise in yields, which rise as prices fall, has shocked investors over the past week, evident from poor trading and a big sell-off on Thursday. The Nasdaq fell nearly 4.9% for the week as technology stocks were hit the hardest, but the S&P 500 fell about 2.4% for the week.
“I think it’s probably going to be a tug of war in the short term,” said Sam Stovall, chief investment strategist at CFRA. Stocks reflect optimism about the economy, and now bonds are being added.
‘People forget why we’re seeing a huge increase year on year [economic] indicators. ‘It is that we have only entered the depths of the recession … and that we are now, to a large extent, just above pre-pandemic levels again,’ he said.
Stocks performed poorly on average in February, but this year they were higher, boosted by the improving economy, vaccine vaccination and the prospect of a major stimulus package. The Biden administration’s $ 1.9 billion stimulus package is due to go to the Senate next week.
The expected economic boost of stimulus also increased yields, and it also increased concerns about inflation.
“March is actually a pretty good month for the market. It’s the fourth best in terms of average price change. It’s the fourth best in terms of progress, but still it’s the fourth lowest in terms of volatility,” he said. Stovall said.
The average increase in March since World War II was 1.1%. But in the fourteen years, like this, when stocks were lower in January but higher in February, the S&P rose by an average of 1.9% in March.
For February, the S&P rose 2.6%, while the Nasdaq rose 0.9%. The Dow rose 3.2% and the Russell 2000 6.1%.
Stovall, which expects a sell-off in the market, said the technology and consumer discretion sector performed the worst last week when selling shares, but that it also achieved the most. These sectors are also likely to sell more in any further downturn.
“It can be sold driven by exchanging expensive technological stocks for the smaller and less market-driven issues,” he said.
Jim Caron, head of global macro strategies at Morgan Stanley Investment Management, said one issue for the market was that the price movement surprised investors. “It was really the speed with which it happened that worried everyone,” he said. He noted that the move over the past week has been characterized by the fact that it was also in securities with a shorter duration, such as the 5-year note.
“The market has tested the Fed’s intention to keep rates low for a long time,” Caron said. “They need to make sure that the markets realize that they are serious on this course to make sure that we get a complete and robust recovery, but they also do not want to be so devilish that we suddenly price all kinds of inflation expectations …. and tariffs are only rising. ‘
“They want to see a rise in tariffs for a good reason,” he said.
Other data in the coming week include the ISM manufacturing data on Monday and Thursday’s jobless claims, important after an unexpected decline in last week’s data.
Earnings season is declining, but retailers will report on Tuesday, with Target, Kohl’s and Nordstrom, and Costco and BJ’s Warehouse on Thursday.
The annual CERAWeek Energy Conference runs throughout the week and features presentations from industry officials from Saudi Aramco, Chevron, ConocoPhillips, Total and others. The conference has been a mainstay of the oil industry for over three decades.
Week calendar in advance
Monday
Earnings: Zoom Video, MBIA, Ambac Financial, Hilton Grand Vacations, Inovio Pharma, Perrigo, Boingo Wireless, Tegna
9:00 am New York Fed President John Williams
09:05 am Fed Governor Lael Brainard
09:45 PMI for manufacturing
10:00 ISM production
10:00 a.m. Construction spending
14:00 Atlanta Fed President Raphael Bostic
Tuesday
Vehicle sales
Earnings: Target, Box, Hewlett Packard Enterprise, Nordstrom, Ross Stores, International Game Technologies, AutoZone, Kohl’s, Abercrombie and Fitch, Hovnanian
13:00 Fed’s Brainard
14:00 San Fed President Mary Daly
Wednesday
Earnings: Wendy’s, Dollar Tree, Brown-Forman, Vivendi, Splunk, Marvell Tech, Snowflake, Vroom, American Eagle Outfitters
08:15 ADP employment
09:45 PMI Services
10:00 am Patrick Fed President, Patrick Harker
10:00 ISM Services
12:00 pm Boston Fed se Bostic
13:00 Chicago Fed President, Charles Evans
14:00 Beige book
Thursday
Earnings: Broadcom, Costco, BJ’s Wholesale, Gap, Burlington Stores, Ciena, Michael’s Cos, IMAX, Kroger, Cooper Cos
08:30 Initial Unemployment Claims
08:30 Productivity and costs
10:00 Factory Orders
12:05 PM Fed Chairman Jerome Powell
Friday
Earnings: Great Lots
08:30 Employment
08:30 International Trade
15:00 Consumer credit
15:00 Atlanta Fed se Bostic