Summary and Price Action Rundown
US equities were mostly higher today as Treasuries rallied amid today’s key inflation data and adverse Covid-19 vaccine news, while investors await tomorrow’s unofficial start to first quarter earnings reporting. The S&P 500 rose 0.3% today, posting a new record high and upping year-to-date gains at 10.3%. The Euro Stoxx Index closed slightly higher while Asian equities were mixed overnight. Longer-dated Treasuries rallied after today’s inflation print delivered only a modest upside surprise and the 30-year auction was well-received (more below), with the 10-year yield declining to 1.62%, which is on the lower side of the recent trading range. Meanwhile, the dollar extended its recent reversal from multi-month highs. Oil prices gained but remained well shy of recent highs, with Brent crude rising toward $64 per barrel after an upbeat OPEC report.
Treasuries Sail Through Today’s Challenges
With a highly-anticipated inflation data release and a 30-year note auction on the calendar, traders were wary of the potential for renewed volatility in Treasuries but the actual price reaction was encouragingly favorable. The Consumer Price Index rose 0.6% month-on-month in March, up from 0.4% in February and above consensus expectations of 0.5%. Gasoline prices were the biggest contributor to the monthly gain, surging 9.1% in March and responsible for about half the overall CPI increase. Gasoline is up 22.5% from a year ago, part of a 13.2% increase in energy prices. Food was up 0.1% overall, with food away from home the largest contributor at 3.7%. The shelter component also came in above expectations at 0.3%. This pushed the annual rate up to 2.6%, above expectations of 2.5% and well above February’s 1.7%, as the base effects of the pandemic take hold. Furthermore, Core CPI, which excludes the more volatile food and energy components, rose 0.3% m/m and 1.6% y/y, both above expectations of 0.2% and 1.5%.
Despite headline CPI growth of 0.6% marking the fastest increase in consumer prices since 2012, investors were seemingly cognizant of base-effect distortions in the data, as both equity and sovereign bond markets were notably indifferent. Traders instead focused on the announcement from US federal health officials calling for a suspension of Johnson & Johnson’s Covid-19 vaccine amid the rare formation of blood clots in a handful of inoculated individuals. The statements rattled market confidence in the nation’s vaccination campaign, as the Dow Industrials opened lower following the announcement. Shares of J&J dropped 3% in premarket but closed only 1.3% lower in today’s trading. Jeff Zients, the White House Covid-19 response coordinator, assured the public that “this announcement will not have a significant impact on our vaccination plan.” Vaccine production from Pfizer and Moderna currently comprise 95% of weekly allocated vaccines with J&J accounting for the remaining 5%. The White House stated the US expects to have enough vaccine supply to meet demand by May despite the suspension.
Meanwhile, longer-dated Treasuries yields declined this morning amid broad market circumspection, and further descended following today’s auction of $24 billion in 30-year debt. The US Treasury offered the 30-year notes at an auction high-yield of 2.32%, falling below the when-issued rate of 2.34%, and the bid-to-cover ratio of 2.47 outpaced the six-month average of 2.28. The benchmark 10-year rate headed to 1.62% after the sale, which is its lowest level since late March. – MPP view: Nice win for the Fed here, with the data very much adhering to their story of a transient boost and market participants clearly looking for an upside surprise that exceeded today’s magnitude. We still believe that the current equanimity will run into questions about a taper over the summer unless the Fed begins to message more forcefully about the continuation of QE over the coming months rather than focusing on rate hikes, as the two are inextricably linked and the taper fires the starting gun on the process of accommodation withdrawal.
OPEC Conveys Upbeat Signals
As some of the world’s wealthiest nations continue to struggle with resurgent Covid-19 rates, the Organization of the Petroleum Exporting Countries reported that a brightening outlook ahead and historic stimulus packages will boost both economic activity and oil demand this year. OPEC increased its 2021 global demand forecast by 100,000 barrels a day and raised its forecast for global economic growth by 0.3 percentage points to 5.4%. The increased demand forecast driven by a better than expected second half of the year forecast is credited to stimulus programs, ease of pandemic lockdowns, and an acceleration in the vaccination rollout mainly in wealthy nations. For context, OPEC and its allies (OPEC+) have maintained disciplined supply cuts that helped support oil prices since the crash last spring but announced a taper of the curbs at their most recent meeting earlier this month. Also, Iran, which is exempt from the cuts of the OPEC+ alliance, increased its output by 137,000 barrels a day in March. China has been importing more oil from Iran in recent months, with Tehran circumventing US sanctions. Investors have been closely monitoring indirect talks between Iran and the US as the two sides consider reviving the 2015 nuclear deal that could possibly have Washington lift those sanctions that currently prevent Tehran from exporting oil at will. Additionally, the cartel slightly reduced its forecast for the 2021 supply growth from outside of OPEC, decreasing its forecast by 30,000 barrels a day. – MPP view: Since they just announced a taper of output curbs, the cartel is certainly incentivized to put the best face on the demand outlook and it is hard to tell whether they are tapering because they can’t keep their members disciplined or whether they really see demand improving so much, we suspect that this report contains some meaningful element of wishful thinking.
US Small Businesses Grow More Confident – The NFIB Small Business Optimism Index increased to 98.2 in March, the highest in 4 months, from 95.8 in February. While seven of the ten components increased in a positive sign, the uncertainty index increased to 81 from 75 which was the lowest since April last year, as owners struggle if it is a good time to expand their businesses. NFIB Chief Economist Bill Dunkelberg added, “Main Street is doing better as state and local restrictions are eased, but finding qualified labor is a critical issue for small businesses nationwide. Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force. However, owners remain determined to hire workers and grow their business.”
SPACs in Focus– Following the SPAC (Special Purpose Acquisition Company) boom of the last few years, the SEC issued new guidance that warrants, which are issued to early investors in the deals, might not be considered equity instruments and may instead be liabilities for accounting purposes. This is likely to disrupt filings for new SPACs until the issue is resolved. The SEC has been raising concerns that investors are not being properly informed on risks related to what are often described as blank check companies. The SEC has been reaching out to accountants last week and the judgment is that it is unlikely the SEC will declare any registration statements effective until they rule on the warrant issue. More than 550 SPACs have filed to go public in 2021, seeking to raise a combined $162 billion, which exceeds the total for all of 2020, during which SPACs raised more than every prior year combined. In an April 8 statement, John Coates, the SEC’s top official for corporate filings, warned against viewing SPACs as a way to avoid securities laws.
However, deals are still getting done through existing SPACs, evidenced by Southeast Asia’s ride-hailing giant Grab announcement that they will go public through a SPAC merger with Alimeter Growth Corp. The deal values that company at $39.6 billion, which would be the largest blank-check merger to date. As part of the deal, SoftBank-backed Grab will receive about $4.5 billion in cash, which includes $4 billion in a private investment in public equity arrangement, managed by BlackRock, Fidelity, T. Rowe Price, Morgan Stanley’s Counterpoint Global fund and Singapore’s sovereign wealth fund Temasek.