Summary and Price Action Rundown
Global risk assets are building on last week’s gains as optimism continues to build for an impending economic recovery amid upbeat growth signals, upsized US fiscal stimulus, and expanding Covid-19 vaccine distribution. S&P 500 futures indicate a 0.3% higher open after the index advanced 4.7% last week to put gains for the year at 3.5%. Equities in the EU are also continuing upward, while Asian stocks posted robust gains overnight. A broad dollar index is hovering below its recent two-month highs, while longer-dated Treasury yields are continuing to edge higher, with the 10-year at 1.19%. Brent crude prices are extending their gains above $60 per barrel amid rising optimism over demand.
Secretary Yellen Advocates Bold Pandemic Relief Bill
The Biden administration and Congressional Democrats move ahead with unilateral approach to the American Rescue Act as Treasury Secretary Yellen makes the case for super-sized stimulus. Investors are noting Secretary Yellen’s strong advocacy for the $1.9 trillion plan on Sunday’s news programs, in which she indicated that a return to full employment would be possible next year with this degree of muscular fiscal support. This follows a series of maneuvers designed obviate the need for GOP support for the program and some high-profile criticism from ex-Treasury chief Larry Summers, who expressed concerns that overdoing stimulus would overheat the economy and spur inflation. Late last week, the Senate approved 51-50 a measure, with minor amendments, allowing Democrats to pass Biden’s relief plan through budget reconciliation. Votes for the measure fell strictly along partisan lines, with Vice President Harris casting the tie-breaking vote. Small amendments, including holding off on minimum wage increases and ensuring that wealthy Americans do not receive the $1400 stimulus payments, were added during the session, though none remain binding. The measure now returns to the House for a vote on the amended measure and, if passed, will proceed to the indicated committees for finalization by March. On Friday, President Biden emphasized that the Covid-19 relief bill stands as a higher priority than bipartisanship, offering his strongest criticism of Republican lawmakers since taking office and indicated that the Democrats would go it alone. if necessary, to get needed aid to struggling Americans. Speaker Pelosi has stated that the budget resolution will be brought to the floor later today and that committees will begin working on the specifics of the bill starting today. – MPP view: Though not every penny is likely to make it through, the Biden administration has strongly committed to the upper end of its stimulus spending range and put the marker down that it will aggressively pursue its legislative agenda, and so far it appears that Dem moderates like Senator Manchin are disinclined to stand in the way, all of which is positive for stocks and growth.
Economic Optimism on the Rise Despite Tepid Payrolls
Although this week’s data calendar is relatively light, market participants are increasingly on the lookout for signs that the US recovery is getting a head start. In January, the US economy added 49K jobs, missing the consensus estimate of a 100K rise but still representing an improvement on December, while the unemployment rate dipped from 6.7% to 6.3%. The nonfarm payrolls print was preceded last week by Thursday’s initial jobless claims tally, which showed that 779K Americans filed for unemployment benefits in the last week of January, a significant decrease to from the previous week’s level of 812K, and also well below market expectations of 830K. It marked the third straight week of falls in claims and the lowest amount since the last week of November but remains far above pre-pandemic levels of around 200K. And on Wednesday, payroll provider ADP estimated that private businesses hired 174K workers, handily outpacing market expectations of an increase of 49K, and recovering from a 78K decline in December. Other US data last week was also solid, with January Purchasing Managers’ Indexes (PMIs) and December factory orders and durable goods reflecting robust activity. January consumer price (CPI) data and weekly jobless claims figures will be in focus this week. Regarding the former, recent inflation readings have been punchier than expected though January’s CPI reading is expected to show little change from December. Market-based gauges of inflation expectations are at multi-year highs, however, revealing investor expectations of rising price pressures. – MPP view: We think inflation data will be noisy after the distortions of 2020 but that the pandemic will, over the medium to longer term, have an inflationary sting in the tail. We expect the Fed to hold to its commitment to be permissive rather than proactive in its policy posture toward the first wave of post-pandemic price pressures that are likely to materialize in the second half of this year. We expect that, around the summer or fall, the Fed passing the test of its new inflation targeting policy will restrain dollar appreciation and keep the Treasury yield curve biased toward steepening.
Additional Themes
Earnings Season Continues to Provide Little Direction for Stocks – Fourth quarter (Q4) corporate results continue to be overshadowed by overarching market themes, like the GameStop episode and the brightening growth outlook, and today’s calendar is light. This week features the last major concentration of reports, with Twitter, GM, Coca-Cola, Disney, and Expedia among the most high-profile. With 295 of the S&P 500 companies having reported Q4 results so far, 74.5% have topped sales expectations and 81.0% have beaten earnings estimates, continuing the pandemic trend of overly conservative analyst forecasts. To this point, however, upside surprises on these quarterly figures have provided scant support for stock prices, though last week featured broadly more upbeat price action amid the waning volatility in short-squeeze stocks and better-than-expected growth data.
Latest Podcast – On this week’s Macrocast, we unpack the complicated jobs report, discuss the Biden stimulus package and its critics, and take a moment to review the Trump economy — including discussing how the jobs numbers would have played out in an alternate universe with no pandemic. We also chat about the potential for a pandemic-related baby bust and its economic impact. Latest Macrocast
Tom Terrific – In his first year with the Tampa Bay Buccaneers, Tom Brady won his seventh Super Bowl in a lopsided contest last evening against the Kansas City Chiefs. He now has more Super Bowl wins than any franchise in the league, with New England and Pittsburgh having six each. – MPP view: Patriots Nation is strongly represented at MPP and we were rooting heavily for Brady, which was slightly bittersweet but far more sweet than bitter.