House passes $1.9 trillion relief package
Prior week summary
Despite strong U.S. economic data, positive COVID-19 vaccine developments, and dovish comments from Fed Chair Powell, the major U.S. equity indices moved lower for the week as mid and long-term treasury yields continued their march higher and inflation fears reignited. While treasury yields have been steadily moving higher since early January, mid and long-term treasury yields have experienced a significant pickup in the last two weeks, grabbing both headlines and market participants' attention. Last week was no different as the 10-year treasury yield reached an intra-day high of 1.61%, the highest level seen since last February and over 50 basis points higher than the 10-year yield seen at the end of January. The recent rise in yields has been attributed to expectations of both increased U.S. economic output, as COVID-19 vaccinations ramp up and COVID-19 case counts decline, and a stronger conviction that inflationary pressures are beginning to firm. Market participants received economic data updates this week that largely topped expectations. New home sales for January clocked in at 923,000 sales, well above analyst calls for 850,000 sales and the largest figure seen since October of last year. Durable goods orders also smashed expectations, increasing 3.4% in January, triple the consensus estimate, as demand for civilian aircraft propelled the increase in orders. Jobless claims fell to 730,000 claims last week, the lowest reading since late November, as COVID-19 cases continue to decline and mitigation efforts ease around the country. The Commerce Department’s second estimate for fourth-quarter GDP indicated that the U.S. economy expanded at a 4.1% annualized pace, up from the 4.0% reading in the first estimate and bringing 2020 GDP to -3.5%, the largest reduction in yearly output seen since 1946. Expectations for 2021 look much brighter however with The Federal Reserve Bank of Atlanta’s GDPNow model, which attempts to forecast the current quarter’s GDP in real-time, forecasting first quarter 2021 output increasing at an 8.8% annualized pace. Lastly, January’s household income figure turned heads on Friday, rising 10% over the month as the effects of December’s $900 billion COVID-19 relief bill showed up in the data.
Federal Reserve Chair Jerome Powell spoke to committees in both chambers of Congress during the week as he delivered his semiannual monetary policy report. During his testimony, Powell allayed fears of an imminent switch in monetary policy and reaffirmed the Federal Reserve’s commitment to an accommodative monetary policy stance as the U.S. economy works to recover from the damage inflicted by the pandemic and its associated mitigation efforts, saying, “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” and emphasized that the Fed is, “committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.” Notably, Chair Powell downplayed concerns that a significant pickup in inflation is on the horizon saying, “We’ve been living in a world for a quarter of a century where the pressures were disinflationary. Inflation dynamics do change over time, but they don’t turn on a dime. If it turns out unwanted inflation pressures arise, and they’re persistent, we have the tools to deal with that.”
On Saturday, the House of Representatives passed a $1.9 trillion stimulus bill via the budget reconciliation process, setting the stage for negotiations to begin in the Senate. As expected, the bill passed without bipartisan support as no Republican member of the House of Representatives supported the legislation. While the House of Representatives passed their bill with the inclusion of a $15 federal minimum wage stipulation, the Senate parliamentarian ruled on Thursday that the measure cannot be included in the reconciliation process and would instead have to be passed via a stand-alone bill. With the March 14 expiration of jobless benefits for millions of Americans looming, the Senate is expected to begin negotiations immediately as Senate Majority Leader Chuck Schumer has expressed his desire to put the bill before President Biden for signature prior to March 14. Speaking from the White House following the passage of the bill through the House of Representatives, President Biden emphasized the need for quick action saying, “If we act now, decisively, quickly, and boldly, we can finally get ahead of the virus. We can finally get our economy moving again, and the people of this country have suffered far too much for too long. We need to relieve that suffering.”
With COVID-19 case counts declining and vaccinations gaining steam, the Food and Drug Administration (FDA) announced on Saturday that it authorized Johnson & Johnson’s single-shot vaccine for emergency use, making the drug the third vaccine authorized for emergency use in the U.S. On Sunday, the Centers for Disease Control and Prevention gave the final go-ahead with inoculations expected to begin as early as Tuesday of next week. In a statement released on Friday, Johnson & Johnson indicated that it was ready to begin shipments of the vaccine immediately and is prepared to vaccinate up to 20 million individuals in the U.S. by the end of March saying, “Johnson & Johnson is committed to making its COVID-19 vaccine candidate available on a not-for-profit basis for emergency pandemic use. The Company is prepared to supply its vaccine immediately upon EUA and expects to deliver enough single-dose vaccine candidate by the end of March to enable the full vaccination of more than 20 million people in the U.S. The Company plans to deliver 100 million single-dose vaccines to the U.S. during the first half of 2021.”
The look forward
In a busy week for economic data releases, market participants are looking forward to the release of updated figures on the ISM Manufacturing Index, ISM Non-Manufacturing Index, construction spending, ADP employment report, jobless claims, factory orders, and most notably, the February non-farm payroll report. Federal Reserve Chair Powell speaks on Thursday afternoon.
Market implied policy path (Overnight indexed swap rates)
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