The Week Ahead – Growing Pains

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

The jobs report last Friday was an absolute scorcher, 379K versus 200K expected. The private payroll number was even better at 465K versus 200K expected – dropping the unemployment rate to 6.2%. Even with the big increase in payrolls, the number of jobs in the United States is still down by nearly ten million from the pre-pandemic level, which argues for fiscal stimulus. On Saturday, Congress passed the $1.9 trillion stimulus bill (the American Rescue Plan), clearing the path for another longer-tailed $2 trillion infrastructure package. That level of fiscal support is more than enough to fill the output gap caused by the pandemic.

Friday’s blowout jobs number fits our narrative of an increasingly strong economic backdrop. Of course, all this economic strength is giving the bond market fits. The problem is not so much that the 10-year Treasury yield is 1.55%. Rather, it is that it has gotten there so quickly. We tend to see interest rate tantrums at the beginning of recoveries, which in turn hits the stock market. Overtime bond yields move in sympathy with GDP, and since that is likely to be extremely strong this year, interest rates may continue to climb. However, even if the yield on the 10-year Treasury gets to 2% this year, that is still a level supportive of current equity valuations. Our view is that higher interest rates are indeed a positive signal. Investors are becoming more comfortable that economic recovery is happening more quickly than expected. Bond investors are edging away from low/negative yielding fixed income in favor of more productive investment opportunities.

Much of the economic story hinges upon the continued strength in the labor market. Economic activity in the services sector is now rising as Covid fears diminish and many states and cities loosen their restrictions. That ought to reduce the pressure on consumer services businesses, so they will need to make fewer layoffs. Covid cases, hospitalizations, and fatalities continue to head lower; however, the B117 (U.K.) variant is inexorably becoming more dominant. Since B117 is more contagious and quite likely more virulent, there is a race between the vaccine rollout and this variant. Vaccine distribution is moving quickly. With over 17% of adults having received at least one dose, the odds of reaching herd immunity within a few months appears increasingly likely.

This week keep an eye on the Consumer Price Index (CPI). Since the price of commodities have been moving higher, we should expect to see those higher prices filtering into inflation statistics as producers attempt to pass along higher input costs. With the labor market still weak, it is unlikely we will see much inflation, but it definitely bears watching closely.

Data deck for March 8–March 12: