Holiday Shortened Week Shows Encouraging Numbers.

The holiday shortened week saw encouraging economic prospects translate to a textbook, pro-cyclical moves across markets as evidenced by rallies in cyclical areas of the stock market, commodities, and bond yields.

The economic calendar provided a boost with robust retail sales, continued strength in the housing market, and further evidence of a strong manufacturing sector. All major indices set new record highs on Tuesday, but the S&P 500 finished the week down 0.71% due to heavy weights in technology and healthcare which struggled. Financials, materials, industrials, and energy were all positive (as was the equal weight S&P). Bond yields moved decisively higher and steeper, translating to softness in higher valuation and rate sensitive areas. The USD traded lower in step with its counter-cyclical nature while commodities moved higher (ex/oil).

Market Anecdotes
• One year ago, last Friday, the S&P 500 closed at a record high, then went on to lose 33% over the next five weeks.
• Wal-Mart’s earnings call marked the unofficial end of what was an encouraging earnings season where, despite record beat rates, stock price reactions were one of the weakest on record.
• Significant debate continued sur- rounding what level of yields will begin to prove troublesome for equities. Market internals remain encouraging at this time.
A sustained move higher in yields with a simultaneous confirmation of a shift in market internals remain a key focus.
• Developed market international stocks were up last week while emerging markets were down slightly. Both outperformed broad U.S. markets. Yield curve steepening has varied globally.
• Inflation is coming in the near term due to base effects, clear evidence of bottle- necks, and some order of pipeline effect. 5 year forward breakeven have recovered but are still not overly high.
• Fed speakers (ten last week) were busy pre-excusing the coming uptick in inflation given their intent on maintaining balance sheet operations and policy rates for the time being.
• U.S. policy developments last week included an immigration reform proposal, a walk back on prospects for student loan debt cancellation, extending foreclosure moratoriums through June 30th, officially rejoining the Paris Agreement, and the beginning of addressing tax increases.
• The stimulus package is expected to pass the House this week, followed by the Senate in early March, and POTUS signing into law mid/late March.
• The Atlanta Fed GDP Now Q1 estimate surged to 9.5% after factoring in the economic data last week (retail sales, industrial production, regional surveys).
• Former ECB President Mario Draghi officially replaced Giuseppe Conte as Italy’s new PM.
• Bloomberg reported Pfizer and BioNTech SE vaccines “appeared to stop the vast majority of recipients in Israel becoming infected, providing the first real-world indication that the immunization will curb the transmission of the coronavirus.” Economic Release Highlights
• January Retail Sales crushed consensus forecast (5.3% vs 1.1%) on the headline number as well as all sub-index metrics including ex-vehicles & gas (6.1% vs 0.5%) and control (6.1% vs 0.9%).
• January Industrial Production came in at a very solid 0.9%, beating consensus of 0.5%. Both manufacturing output and capacity utilization also came in higher than forecasted.
• February Housing Market Index (84 vs 83) was in line with estimates, continuing to reflect extraordinary positive homebuilder assessments of current housing market conditions.
• January Housing Starts (1.580M) and Permits (1.881M) missed and beat forecasts respectively after strong beats the prior two months.
• February flash Purchases Mangers Index (PMI) (M,S,C) showed near universal strength and improvement across the manufacturing sector but continued weakness in services (CoVid) with the U.S. continuing to act as a bright spot – U.S. (58.5, 58.9, 58.8), EU (57.7, 44.7, 48.1), and Japan (50.6, 45.8, 47.6).
• The February Empire State Manufacturing Index doubled consensus estimates, registering 12.1 vs a 5.7 forecast.
• The February Philly Fed Manufacturing Index came in strong at 23.1 versus forecast of 20.0.

 

 

 

 

 

 

 

 

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