Yields, the Economy, and COVID
Yields have abated slightly this week, allowing equities to climb higher. The economic data has surprised to the upside so far, building on last week's stellar Jobs Report. Progress continues to be made on the vaccine front. Here's what we're seeing this week:
Where are Yields Headed? The Yield on the 10-year Treasury has receded from Monday's high of 1.74% and currently rests at 1.67%. In fact, yields have decreased 10 basis points from the high of 1.77% near the end of March. As we pointed out last week, the recent rise in the 10-year yield makes the bell weather bond much more attractive to bond buyers, especially Foreign bond buyers, versus other Sovereign bonds at low or negative yields.
This has caused the 10-year Yield to settle down a little. More than likely, the yield on the 10-year will be range bound for a little while. Since 2012, the 10-year had established a floor of 1.43% to 1.47% (see graph below). This had been in place for the past 8 years until the pandemic hit last year, causing the 10-year Yield to plummet, violating the floor. Then, as the pandemic began to recede last Summer and the prospects of the economy re-opening improved, the 10-year Yield began to rise in August. The long-term resistance of 1.43% was broken on February 25th. Yields are likely to trade between 1.43% and 2.30% unless the floor or ceiling is broken.
Upbeat Economic Numbers This Week. So far, it's been a positive week for economic releases. Consumer Credit, released at the market close today, showed a substantial rise from January. The market was expecting February's number to come in at $5 bil, but it rose to $27.6 bil, instead. This is the largest one-month increase since January of 2018. Consumer Credit it typically a foreshadow of consumer spending and confidence. The Investor's Business Daily Economic Optimism survey showed a reading of 63.7 for March, which exceeded the market's expectations, but is also the highest reading since February of last year (right before the pandemic began). This morning, Weekly Jobless Claims disappointed by hitting 744,000 new claims, while the market was expecting only 680,000 claims. For the last 5 months, weekly claims have been up and down week-to-week. Expect more of this type of range-bound movement until states like California (slated for June) re-open businesses fully. The Services indices, ISM and Markit PMI, both showed continued expansion in the areas of finance, personal & business services, IT, hotels, and restaurants. The Markit Services PMI Index reached the highest level (60.4) in more than 5 years. The ISM Services Index also hit the highest level (63.7) in more than 5 years. Lastly, Job Openings exceeded the market's expectations with more than 7.3 million listings in February. As unemployment continues to decline, getting these jobs filled will spur more economic growth. This morning, the market received a surprise in the PPI (Producer Price Index). The market expected an increase of 0.5% for March, but the number came in at +1.0%. Part of the shock is due to higher input prices and part due to supply chain constraints. Yesterday's Fed Minutes that were released indicated no change in the Fed's accommodative policy, despite inflationary pressures. The Fed has stated that they are looking for "average" inflation of 2%, which means they are likely to allow inflation to run up to even 3% before batting an eye. Meanwhile, the National Financial Conditions Index improved over the past week and continues to show a stable economic environment.
What About the Virus? It is estimated by the CDC that at the current rate the vaccines are being administered (more than 3 mil shots daily), 70% of the U.S. population should have received at least one shot of the vaccinations by June 16th. That number, plus the number who have already been infected (31.6 mil) and already have COVID antibodies, would put the total of those with antibodies in the U.S. at 80% of the population. According to the CDC's website, herd immunity is reached between 65 and 70% infection/vaccination of a population. This means that by June (at the latest) the U.S. economy should be fully re-opened (hence, California's recent announcement of full re-opening by June 15th.
The U.S. leads the world in vaccination rate success. According to John's Hopkins, the U.S. currently ranks #1 in the world for the total number of people that have been fully vaccinated. The U.S. ranks #9 in in the world for the percentage of the population fully vaccinated. There is no developed country with a higher vaccination success rate than the U.S. As a result, the number of daily deaths in the U.S. has plummeted (7-day average down 77% since peak on Jan 26th).
A lot of the reason for the drop in deaths is due to nearly 70% of the seniors in the U.S. (age 65+) having already been vaccinated and that age group accounting for more than 80% of all U.S. COVID deaths. This has sparked optimism for the U.S. economy and that's why the yield on the 10-year Treasury has risen. This success in the U.S. versus other developed countries is also why the U.S. dollar has risen of late. In September of 2020, the U.S. dollar broke the long-term uptrend that began in 2011. Then, with the approval of the COVID vaccines in December and the successful number of shots going in arms in January, the U.S. dollar rallied. It's important to remember that the U.S. dollar is not an absolute - it's based on the relative value of other currencies. The vaccine struggles in other countries, such as the U.K.
We would expect the U.S. dollar to trade in a little bit of a range, depending upon whether other countries can ramp up their vaccine progress. The woes for AstraZeneca continue as Australia, the Philippines, and the African Union have curbed COVID shots over safety concerns and supply problems. The U.S. has done a better job by utilizing multiple different vaccines instead of relying on one or two to combat COVID. Expect the Dollar to head higher if the DXY breaks through the long-term upward trend at 95. Conversely, expect the Dollar to trade lower if the DXY breaks below 88. If DXY exceeds 95, non-U.S. assets and Gold should be re-evaluated. If DXY goes below 88, non-U.S. assets should prosper and Gold should recover losses for the year.