Traders on the floor of the New York Stock Exchange
Source: The New York Stock Exchange
The tug-of-war between stocks and rising bond yields could set the tone for the coming week, particularly if positive economic data continues to push Treasury yields higher.
Friday’s February employment report is the highlight of the week’s data and an important current look at the impact of the virus on the economy, after just 49,000 jobs were added in January. For February, economist expect to see 218,000 jobs added, and the unemployment rate should stay the same at 6.3%, according to Dow Jones.
Fed speakers are also a major focus of the markets, after the rapid rise in bond yields this past week had the feel of a runaway train. Fed Chairman Jerome Powell is the most important speaker, when he appears at a Wall Street Journal summit Thursday.
“If he wants to stop this rise in rates, he does have to say something. But he risks sounding hawkish. The more dovish he sounds, the higher rates will go,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. When the Fed is described as dovish, it means it is maintaining easy policy, such as keeping interest rates at low levels.
Some Fed watchers doubt the central bank will comment on the rise in yields any more than Powell did this past week when he said the move was the result of a strengthening economy. But bond pros say Powell could reinforce that Fed policy will remain easy for along time to come.
The rapid runup in interest rates this month caught investors by surprise. The benchmark 10-year yield, which influences mortgages and other loans, was at 1.46% Friday, about 15 basis points [0.15%] above the level it was at just a week earlier. After a big surge Thursday, the 10-year yield traded on both sides of 1.50%, which is the consensus view of where yields would be at the end of the year, not the beginning.
The fast move up in yields, which rise when prices fall, scared stock investors in the past week, evident in choppy trading and a big selloff Thursday. The Nasdaq fell nearly 4% for the week, as technology shares were hit the hardest hit, but the S&P 500 was down about 1.3% for the week.
“I think it’s probably going to be a short-term tug of war,” said Sam Stovall, chief investment strategist at CFRA. Stocks have been reflecting optimism about the economy, and now they are being joined by bonds.
“People forget the reason why we’re looking at very high year-on-year increases in [economic] indicators. It’s that we were just entering the depths of recession…and we are now in many measures just getting back above pre-pandemic levels,” he said.
Stocks on average have performed poorly in February, but this year they were lifted by an improving economy, the vaccine rollout and the prospect of a big stimulus package. The Biden administration’s $1.9 trillion stimulus package should go to a Senate vote in the week ahead.
The expected economic boost from stimulus has also been driving yields higher, and it has also heightened concerns about inflation.
“March is actually a pretty good month for the market. It is the fourth best in terms of average price change. It is the fourth best in frequency of advancement, yet it is the fourth lowest in terms of volatility,” Stovall said.
The average gain in March since World War II was 1.1%. But in the 14 years, like this, when stocks were lower in January but higher in February, the S&P rose an average 1.9% in March.
For February, the S&P gained 3.4%, while the Nasdaq lagged with a 1.6% gain. The Dow rose 3.9%, and the Russell 2000 was up 6.8%.
Stovall, who has been expecting a market sell-off, said technology and consumer discretionary did among the worst this past week, when stocks were selling off, but they had also gained the most. Those sectors would likely also be sold more in any further pullback.
“It could be selling driven by a rotation out of expensive tech stocks into the smaller and less market driving value issues,” he said.
Jim Caron, head of global macro strategy at Morgan Stanley Investment Management, said one issue for the market was that the rate move took investors by surprise “It was really the speed at which it happened that made everybody worried,” he said, noting the move this past week was distinguished by the fact it was also in shorter duration securities, like the 5-year note.
“Basically the market was testing the Fed’s resolve of keeping rates low for a long time,” said Caron. “They have to make sure the markets understand they are seriously on this course to make sure we get a full and robust recovery, but also they don’t want to be so dovish that all of a sudden we price in all kinds of inflation expectations… and rates go up just on that.”
“They want to see a rise in rates for a good reason,” he said
Other data in the week ahead includes ISM manufacturing data Monday and Thursday’s jobless claims, important after an unexpected decline in the past week’s data.
Earnings season is winding down, but retailers will be reporting, with Target, Kohl’s and Nordstrom on Tuesday, and Costco and BJ’s Warehouse Thursday.
The annual CERAWeek energy conference runs all week long, and includes presentations from industry officials from Saudi Aramco, Chevron, ConocoPhillips, Total and others. The conference has been a mainstay for the oil industry for more than three decades.
Week ahead calendar
9:00 a.m. New York Fed President John Williams
9:05 a.m. Fed Governor Lael Brainard
9:45 a.m. Manufacturing PMI
10:00 a.m. ISM manufacturing
10:00 a.m. Construction spending
2:00 p.m. Atlanta Fed President Raphael Bostic
1:00 p.m. Fed Governor Lael Brainard
2:00 p.m. San Francisco Fed President Mary Daly
8:15 a.m. ADP employment
9:45 a.m. Services PMI
10:00 a.m. Philadelphia Fed President Patrick Harker
10:00 a.m. ISM services
12:00 p.m. Atlanta Fed President Raphael Bostic
1:00 p.m. Chicago Fed President Charles Evans
2:00 p.m. Beige book
8:30 a.m. Initial jobless claims
8:30 a.m. Productivity and costs
10:00 a.m. Factory orders
12:05 p.m. Fed Chairman Jerome Powell
Earnings: Big Lots
8:30 a.m. Employment
8:30 a.m. International trade
3:00 p.m. Consumer credit
3:00 p.m. Atlanta Fed’s Bostic