It's All About Yields and Shutdowns This Week
Equities seemed to be tied to the 10-year Treasury Yield of late. On days where the 10-year yield rises, equity prices struggle to gain ground. On top of that, more shutdowns on the international stage due to increased COVID cases is hampering the global reflation trade. Here's our latest Market Musings as we head into the Good Friday holiday.
What Can We Expect From Yields? It's always healthy to take a look back at what yields have done historically before we can get some idea of what to expect from yields going forward. I'm a big believer in studying history and I like catch phrase, "You can't know where you're going until you know where you've been." The historical yield on the 10-year Treasury is 5.90% (1958-2020). Over the last 62 years, the yield on the 10-year reached a peak in 1981 and has wound its way south ever since. Should there be any real surprise that interest rates have climbed more than 90 basis points since August?
Despite the fact that investors should be prepared for interest rates to move higher, the shock has been real and caused investors to rethink their equity themes. Higher interest rates mean over-valued stocks, such as Technology become really expensive and investors have pared their exposure accordingly. The yield on the 10-year Treasury has backed off a high of 1.77% earlier this week, and are trading around the 1.67% mark, helping equities move higher.
The recent rise in yields is a signal that investors are more optimistic about the pandemic and the continued improvement in the U.S. economy. The yield on the 10-year is quite lofty relative to the yield on most other developed nations' bonds this is likely drawing foreign buyers of U.S. government debt looking for higher returns (yields). This should help the yield on the 10-year to settle a little from the recent rise.
More Shutdowns Overseas. As the U.S. has renewed optimism of an end to the pandemic, the opposite has been the case across the pond. A new round of lockdowns has ensued and will remain in place until June. The vaccine rollout in other countries has not gone as smoothly as in the U.S. (even though there have been disruptions in vaccine distribution here in the U.S.). So far, the U.S. leads the world in the total number of people fully vaccinated (52.6 mil) compared to the U.K. (4.1 mil), for example. As a percent of the population, the U.S. (16.1%) is also ahead of the U.K. (6.2%).
What's curious is the fact that daily cases in the U.K. are continuing to hit new lows (4,052 yesterday), as compared to the January 8th peak (68,053). Deaths in the U.K. are near pandemic lows with only 43 deaths yesterday, compared to the January 20th peak of 1,823. So why the new shutdown through June? Britain's chief medical officer stated just yesterday, "It is clear we are going to have to manage it (COVID), at some point, rather like we manage the flu." Here in the U.S., daily cases have increased over the past 3 weeks, but the 7-day average of deaths continues to drop and COVID hospitalizations are at the lowest levels since September 18, 2020. Meanwhile, there's plenty of reasons to continue to be optimistic about the U.S. economy. The latest high frequency data suggests that more Americans are getting on planes, eating in restaurants, and staying in hotels. Just here in Memphis, I have noticed a remarkable difference the past few weeks in in-person dining. Just 6 weeks ago, you can easily find a table at just about any restaurant in town. A few weeks ago, that all changed and a reservation is required in most places as demand has increased substantially.
Economic Data Still Improving. The economic data has been a little choppy this week. So far, ADP employment data disappointed by 33,000, but still came in much higher than the previous month by at least 340,000 jobs. Pending Home Sales were worse than expected, but that shouldn't be a huge surprise as higher yields have helped push mortgage rates higher. Weekly Jobless Claims also disappointed by moving back above 700,000 for the week. However, the bright spot there is that last week's considerable decline to 684,000 claims was adjusted even lower this week to 658,000. On the positive side, the Dallas Fed Manufacturing Index jumped by 11 points to 28.9, which is the highest reading since October of 2018. The Chicago PMI also jumped to 66.3, much higher than the expected 60.7. ISM Manufacturing beat expectations with a reading of 64.7. Tomorrow the March Jobs Report will be released while the market is closed for Good Friday. Payrolls are expected to have increased by 647,000. That's a number that has increased since the beginning of the week, when the market was expecting a number of 639,000 new jobs. It will be interesting to see if March's reading has any effect on markets by Monday. Meanwhile, the underlying data is steady, providing a clear picture of economic health. The Chicago Fed's National Financial Conditions Index remains well below zero (indicating better than normal conditions) and the St. Louis Fed's Financial Stress also remains well below zero (indicating a lack of stress in the system). It might be a slow progression of improvement, but the economy is managing it week-by-week.