The Week Ahead – Love Vaccine + Money

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.

I hope everyone had a wonderful Valentine’s Day weekend. In fact, there is a lot to love about the current positive trends for COVID-19. Cases are now falling by about 24% per week. We expect 140MM more people to be inoculated over the next two months, at which point the country will be very close to herd immunity. While the virus is not completely going away, we expect things to start feeling somewhat normal by the summer.

We have raised our estimated amount for a fiscal relief/stimulus that will be authorized for 2021 from $2 -$2.5 trillion to $3 -$4 trillion. Our sense is that this may be pushing beyond what is optimal for the markets, as it risks overheating the economy and would generate a higher path for interest rates. If yields go up too far too fast, we could see a shock that would likely dislocate markets. The initial $1.9 trillion package is most likely more than enough to close the output gap caused by the economic fallout from the pandemic. The view from the Biden administration is that it is better to go big rather than risk an undershoot. This was very much the case when the Obama/Biden administration presided over the Emergency Economic Stabilization Act of 2008, which authorized the Treasury Secretary to create the $700 billion Troubled Asset Relief Program (TARP)—and the $840 billion stimulus package under the American Recovery and Reinvestment Act of 2009. The combined stimulus of $1.5 trillion led to one of the slowest economic recoveries on record. Keep in mind many economists were worried about runaway inflation, which never materialized.

Interest rates have crept higher along with inflation expectations. However, as long as COVID is still here and unemployment remains high, core inflation is likely to remain low and stable. The services components of CPI, such as rents, airline fares, accommodations, vehicle insurance, auto rental and leisure/recreation, remain crushed by the impact of the virus.

This week, we will see the Producer Price Index (PPI) print, which measures the inflation in the prices received by domestic producers for their output. We expect this statistic to remain well contained.

While a bond market tantrum is a top risk to our constructive view on markets, the Federal Reserve has indicated they will allow inflation to go above their 2% target. Since overly hawkish central bankers are often the cause of market pullbacks, the fact that the Fed is explicitly stating they will keep rates at the zero bound despite rising inflation should give investors comfort that this recovery still has legs.

Data deck for February 15–February 19: