Treasury yields march higher

Prior week summary

The major U.S. equity indices ended the week mixed with treasury yields moving notably higher amid strong U.S. economic data, dovish comments from the FOMC, and stimulus bill progress. While long-term treasury yields have been marching higher since the turn of the year, last week marked the biggest week over week increase in the 10-year treasury yield since early January, ending the week just above 1.34%, as market participants placed bets that a significant pickup in both consumer spending and inflation may be on the horizon. The bull case for the consumer was reinforced on Wednesday when January retail sales figures smashed expectations, rising 5.3% over the month and posting its largest increase in seven months. The release indicated pickups in spending across all the measured segments, including those hardest hit by the pandemic, namely bars and restaurants. With consumer spending accounting for over two-thirds of U.S. economic output, expectations for first-quarter GDP have begun to improve. The Federal Reserve Bank of Atlanta’s GDPNow model, which attempts to forecast the current quarter’s GDP in real-time, increased its expectations last week and now forecasts the U.S. economy will grow at a 9.5% annualized rate in the first-quarter, up significantly from the 4.5% estimate seen the week prior.

The manufacturing industry also looks to remain on solid footing. The Empire Manufacturing Index posted a 12.1 level for February, above both analyst expectations and January’s 3.5 reading. The Philadelphia Federal Reserve Business Outlook Survey showed strength in February, posting a 23.1 level, below January’s reading but well above consensus estimates. Notably, the report also indicated that survey participants are expecting a higher rate of inflation than they did at the end of last year. The report noted that, “In this month’s special questions, the firms were asked to forecast the changes in the prices of their own products and for U.S. consumers over the next four quarters. Regarding their own prices, the firms’ median forecast was for an increase of 3.0 percent, higher than the 2.0 percent that was forecast when the question was asked in November.”

While the consumer and the manufacturing industry look to be gaining steam, the labor market continues to look shaky. After jobless claims began a downward trend to end last year, that trend has reversed in 2021 and jobless claims are back on the rise. 861,000 individuals filed for unemployment in the last week both above expectations and the revised 848,000 claims seen the week prior. Continuing claims remain on a downward trend as 4.49 million individuals continued to file for unemployment compared to the 4.56 million reported the week prior. The housing sector received several updated figures last week that largely painted a mixed picture of the sector. Housing starts fell over 5% in January as lumber prices continue to rise, but building permits soared in January reporting 1.88 million permits compared to the 1.70 million seen in December. Separately, existing home sales remained strong with 6.69 million sales reported in January compared to the 6.65 million sales seen in December.

Many market participants were encouraged by the FOMC meeting minutes released on Wednesday. The minutes indicated the FOMC sees the U.S. economy “far from” their goals and that loose monetary policy will remain the focus in the near-term, saying, “Participants noted that economic conditions were currently far from the Committee’s longer-run goals and that the stance for policy would need to remain accommodative until those goals were achieved. Consequently, all participants supported maintaining the Committee’s current settings and outcome-based guidance for the federal funds rate and the pace of asset purchases.”

As the March 14 expiration of jobless benefits for millions of Americans looms, House Democrats continued to work on piecing together President Biden’s proposed $1.9 trillion rescue package through the budget reconciliation process last week hoping the House can hold a vote on the contents of the package by the end of the upcoming week. Republicans have criticized the size of the package, arguing that $1.9 trillion is not needed following the passing of the $900 billion relief bill signed into law last December. The package is reported to include $1,400 direct payments to qualifying adults, up to $3,600 per child over the year, enhanced unemployment benefits of $400 per week, $350 billion in aid to state and local governments, $170 billion in school funding, and $20 billion for a national vaccination program. While an increase of the federal minimum wage to $15 per hour by 2025 has been discussed, its prospects remain cloudy as at least two Democratic senators have expressed skepticism over the provision and the bill will likely need every Democratic senator to vote in favor of it to pass. The bill structuring process looks to be winding down and a vote could reach the floor as early as the end of the upcoming week. House Speaker Nancy Pelosi suggested that the bill could pass, “sometime at the end of next week” on Thursday, and Senate Majority Leader Chuck Schumer expressed similar optimism in a letter to colleagues on Friday saying, “The Senate is on track to send a robust $1.9 trillion package to the president’s desk before the March 14 expiration of unemployment insurance benefits. We will meet this deadline.”

The look forward

Market participants are looking forward to the release of updated figures on the Conference Board Consumer Confidence measure, new home sales, fourth-quarter GDP, durable goods orders, consumer spending, jobless claims, and the Chicago PMI, among others. Federal Reserve Chair Jerome Powell testifies in front of the Joint Economic Committee on Tuesday.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)