Treasury yields pull back; Suez Canal blocked

Prior week summary

The major U.S. equity indices finished the week mixed and treasury yields took a breather amid weak economic data, dovish comments from the Federal Reserve Chair, and a blocked Suez Canal. The 10-year treasury yield ended the week lower than where it started for the first time this month as the 10-year treasury yield finished the week at 1.67%, down from the 1.74% yield seen the Friday prior. Global attention turned to the Suez Canal mid-week after the Ever Given, a massive 220,000-ton container ship, ran aground in the canal blocking the waterway and stopping the flow of an estimated $400 million in goods per hour. Salvage crews worked tirelessly for five days with little to show for their efforts, unable to free the ship. Late Sunday evening, reports surfaced that the ship had partially refloated as the change in tide coupled with the efforts of the salvage crews worked to partially free the ship. Optimism is growing that the ship will be completely freed on Monday and that the canal will soon be reopened, but a timeline for the reopening remains unclear.

Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen testified before committees in both chambers of Congress last week on the efforts made by both the Federal Reserve and the Department of the Treasury to support the U.S. economy through the pandemic. As expected, Powell reiterated the Federal Reserve’s commitment to keeping easy money policies in place in order to shepherd the U.S. economy to a strong post-pandemic recovery. Powell looked to downplay any concerns that significant long-term inflationary pressures were on the horizon saying, “In the near term, we do expect, as many forecasters do, that there will be some upward pressure on prices. Long term we think that the inflation dynamics that we've seen around the world for a quarter of a century are essentially intact. We've got a world that's short of demand with very low inflation...and we think that those dynamics haven't gone away overnight and won't.” Core PCE, the Fed’s preferred measure of inflation, received an update on Friday and indicated that prices increased 1.3% in the fourth quarter, well short of the Fed’s goal of 2% average inflation.

Treasury yields have been on an upward tear since the beginning of the year as market participants price in the expectation of a robust recovery to the U.S. economy in the second quarter of this year and beyond. The updated economic figures released last week took aim at that narrative as most of the releases failed to meet expectations. Existing home sales fell to 6.22 million in February, down from the 6.69 million sales seen in January and below the consensus estimate calling for 6.49 million sales. The February existing home sales figure marked a 6-month low, but analysts noted that the harsh February weather for the middle of the country likely played a role in the decline in sales. New home sales also pulled back in February. February new home sales clocked in at 775,000 annualized sales, far below both the 870,000 expectation and the upwardly revised 948,000 reading seen in January. Notably, the drop marked an 18.2% decline from the January figure as sales fell in every region in the U.S. While the latest figure experienced a drop, new home sales have proven resilient throughout the pandemic and the latest release sits 8.2% above last February’s figure.

Turning attention to the manufacturing sector, durable goods orders unexpectedly fell 1.1% in February, the first decline seen since April 2020. The figure saw broad-based declines in the measured segments with shipments dropping 8.9% and orders for motor vehicles and parts falling 8.7% over the month. Many analysts have attributed the drop to supply chain constraints and the harsh February weather, and pointed to the Fed regional manufacturing surveys which have largely suggested improving conditions and sentiment in the manufacturing industry. The third estimate of fourth-quarter GDP provided a bright spot last Thursday as the figure indicated that the U.S. economy grew at a 4.3% annualized pace in the fourth quarter, up from the 4.1% reading seen in the first and second estimate. Weather-related setbacks considered, expectations for first-quarter GDP are rising and expected to outpace that of the fourth-quarter 2020 with the Atlanta Fed’s GDPNow tool, which attempts to forecast the current quarter’s GDP in real-time, forecasting that the U.S. economy will grow at a 4.7% annualized pace in the first quarter 2021. Lastly, jobless claims for the week ended March 20 posted the lowest weekly claims level since the beginning of the pandemic as 648,000 individuals filed for unemployment. While the decline in claims is encouraging, last week’s claims level remains above the highest-reported level of claims prior to the pandemic.

The look forward

Market participants are looking forward to another eventful week of economic data releases as updated figures on the Conference Board Consumer Confidence Index, ADP employment report, pending home sales, construction spending, jobless claims, and the March non-farm payroll report, among others, dot the economic calendar.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)