Weekly Market Summary

Andrew Silver
FOR THE WEEK OF FEBRUARY 26, 2021

A continuation of the move higher in interest rates, backed by relatively encouraging economic reports and continued dovish central bank guidance were the primary themes last week. The move higher in interest rates has caused some indigestion because the move and associated volatility have indeed been historic. Improving growth expectations is a key driver which translated last week to relative outperformance of cyclical areas of the equity markets (financials, energy, industrials, materials) while rate sensitive and higher valuation pockets across global markets lagged. The more cyclical nature of the DJIA and equal weight S&P pushed them both to mark new record highs while the cap weighted S&P 500 fell 2.45% on the week. Higher U.S. rates translated to slight appreciation in the USD (+0.57%) while commodity markets benefited from a move higher in oil (+3.81%) and several industrial metals.

Market Anecdotes

  • Rates moved both higher and steeper again last week. Curve steepening has been pronounced with the 2-10 at 1.30%and the 3m-10 at 1.40%. While bonds are oversold in the short term, the long-term trend line should eventually take yields up to the 2.0%-2.5% area.
  • We saw some very bizarre UST rate action last week. Tuesday saw 2s and 30s fractionally higher while 5s and 10s were lower. The shortest (1bps) and longest (3bps) maturities did not move too much while 5s were up 16bps and 10s & 20s were up only 10bps. A clear kink in the curve.
  • Momentum and technology stocks are bearing the weight of the rise in yields. MTUM, a proxy for the broad momentum factor across the US equity market, was down over 5% across 5 days which is only the second time it has reached that degree of a selloff since March.
  • Central bankers on both sides of the Atlantic did their best to assure markets last week. Powell reiterated the Fed’s commitment to explicit forward guidance to the Senate Banking Committee and offered reassuring views on inflation and the rise in yields. Lagarde and Schnabel also made clear the ECB will ensure there will be no unwarranted tightening of financing conditions.
  • In the past, dovish braying and big QE helped stocks AND bonds but recently markets have been behaving as if there has been a shift in market psychology translating to a change in bond yield to stock price correlation.
    Inflation remained a key focus of market participants last week. BCA noted WTI prices rising 70% since October alongside correlation data between gasoline prices and headline inflation.
  • In a separate research note, BCA addressed several myths surrounding 1970’s style inflation relative to today.
  • Strategas reiterated confidence in the overall market due to continued internal market dynamics such as reopening pairs, BB/BBB spreads, CD vs CS, high beta vs low beta, advance/decline ratios, and cyclical sector performance.
  • The $1.9t stimulus package passed the HOR and is heading to the Senate. Strategas estimates approximately $700b of consumer related stimulus will hit within the next six months.

Economic Release Highlights

  • January Personal Income and Outlays report showed MoM personal income (10% vs 9.4%) and personal consumption (2.4% vs 2.2%) both higher than expected while core PCE was in generally in line with expectations at MoM (0.3% vs 0.1%) and YoY (1.5% vs 1.4%).
  • December’s Case-Shiller Home Price Index rose more than expected for a second consecutive month at MoM (1.3%a vs 1.0%e) and YoY (10.1%a vs 9.6%e).
  • New (923k vs 855k) and Pending (-2.8%a vs 0%e) Home Sales were mixed with new exceeding pending continuing to lag.
  • Conference Board Consumer Confidence for February came in higher than expected (91.3 vs 90.0) but remained somewhat subdued.
  • The final UofM Consumer Sentiment for February remained at the relatively subdued level of 76.8a vs 76.4e.
  • January Durable Goods Orders accelerated faster than expected (3.4% vs 1.1%), well over December’s 0.5%, providing further evidence of an upward trending manufacturing cycle.

The Numbers

This communication is provided by Taiber Kosmala, an institutional consulting firm based in Chicago, IL and is for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies,
goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.
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