Senate amends and passes $1.9 trillion relief package

Prior week summary

The major U.S. equity indices ended an eventful week mixed amid the imminent passage of a $1.9 trillion stimulus bill, strong U.S. economic data, rising treasury yields, and an improving COVID-19 outlook. Mid and long-term treasury yields continued to rise sharply last week as market participants continued to price in the expectation of a strong U.S. economic recovery and the expected materialization of significant inflationary pressures, among other factors. The yield on the 10-year treasury note rose approximately 12 basis points last week, finishing the week at 1.56%, a level not seen since the onset of the pandemic one year ago. Recent rise in long-term yields has brought a steeper curve along with it as the 2-year/10-year spread now sits north of 140 basis points, up roughly 45 basis points since the beginning of February. The rise in yields has also put pressure on equities, particularly growth stocks, in recent weeks as investors update valuations to reflect the rise in rates. Federal Reserve Chair Jerome Powell seemed unphased by the recent run-up in rates when interviewed for the WSJ Jobs Summit on Thursday. After Fed officials earlier in the week commented that they have been watching the bond market selloff, market participants speculated Powell may propose concrete action to address the recent rise in yields, but Powell offered no such action plan. Instead, Powell reiterated comments oft heard in the last year that emphasized the Fed’s commitment to supporting the U.S. economy through the pandemic. When asked about his view of the recent run-up in rates, Powell commented that he, “would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals,” and noted that, “If conditions do change materially, the committee is prepared to use the tools that it has to foster achievement of its goals,” but fell short of announcing any specific action the Fed would take to control the rise in yields. The FOMC’s next monetary policy meeting will be held on March 16–17.

After the House of Representatives passed a $1.9 trillion relief package through the budget reconciliation process the week prior, the Senate amended the House bill and passed a roughly $1.9 trillion bill on Saturday. The bill will now head back to the House of Representatives for a second vote, reflecting the amendments made in the Senate, and if passed, will head to President Joe Biden’s desk for signature and passage into law. Of note, the Senate-passed bill removed the $15 federal minimum wage stipulation after the Senate parliamentarian ruled that the federal minimum wage could not be altered via the budget reconciliation process. The Senate bill also limited the number of individuals who will receive a stimulus payment, limiting payments to individuals who report up to $80,000/year and couples who report up to $160,000/year, and opted to maintain the current level of enhanced unemployment benefits at $300 per week, down from the $400 per week proposition in the House bill. The prospective legislation notably passed without bipartisan support as no Republican member of either chamber of Congress supported either version of the bill, arguing that the price tag is too large, and does not allocate the spending prudently where relief is needed. After the passage of the Senate bill, President Joe Biden emphasized his support for the legislation saying, “This plan puts us on a path to beating the virus. This plan gives those families who are struggling, the most, the help and the breathing room they need to get through this moment.” The bill now heads back to the House of Representatives for a second vote, with a procedural vote expected as early as Monday and passage expected as early as Tuesday.

Market participants were the beneficiaries of a deluge of economic updates last week that largely pointed to a recovering U.S. economy. The February ISM Manufacturing Index reading kicked off the week clocking in at 60.8, notching the highest level seen in the pandemic-era and marking the ninth consecutive month in expansionary territory. The ISM Non-Manufacturing Index failed to produce an equivalent result, falling below expectations to 55.3 but remaining above the break-even 50 level. Construction spending surprised to the upside increasing 1.7% in January to $1.521 trillion, the highest reading in the measure’s history. Increased government spending, private construction spending, and residential project spending primarily drove the increase. Market participants turned their attention to the employment situation for the second half of the week. Wednesday’s release of the ADP employment report indicated that 117,000 private-sector jobs were added in February, well below calls for 250,000 job additions and the 195,000 additions seen in January. Jobless claims ticked up slightly last week as 745,000 individuals filed for unemployment in the last week, up from the 736,000 reported the week prior. Finally, the February non-farm payroll report smashed expectations on Friday after reporting 379,000 job additions in February, nearly twice the consensus estimate. January’s job gains were also revised higher to 166,000 job additions, up from the 49,000 additions originally reported. Most of the job gains in February were in the leisure and hospitality sector as COVID-19 case counts have dropped around the country in recent weeks and many states moved to relax virus-related restrictions. After Friday’s release, the unemployment rate now sits at 6.2%, down from 6.3% reported in January and well off the peak of 14.7% seen in April. On net, the U.S. economy has shed approximately 9.5 million jobs in the last year.

The look forward

In a light week for economic data releases, market participants will look forward to the release of updated figures on wholesale inventories, the Consumer Price Index, the Producer Price Index, and jobless claims, among others.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)