January 25, 2021

Weekly Market Commentary January 18th to January 22nd 2021

With this being a light week of economic data releases, we thought this would be an appropriate time to comment on interest rates.  The Federal Reserve is mainly charged with two tasks: 1) keeping employment strong in our country, and 2) targeting inflation at approximately 2% annually.  Its chief tool in managing those tasks is through raising and lowering short-term interest rates.

The employment task is self-explanatory…a working country is a productive country.  But why is some measure of inflation important?  One reason is that it motivates buyers (consumers) to spend now vs. spending later.  If you want to buy a new car and you know it will cost 2-3% more next year, you might be motivated to head to the dealership tomorrow.  This gets those ever-important consumer dollars into the economy.  Secondly, when you have inflation, you don’t have deflation.  And deflation can cause the opposite of the previous example.  Why buy that car now when it could be cheaper next year?  Thirdly, rising prices drive wage increases which is something all working folks enjoy because it means more money in their pockets.  And with higher wages, governments get the benefit of higher tax revenue.  Lastly, inflation can drive production.  With higher wages and higher spending, consumers push production higher as aggregate demand increases.  All in all, a tepid level of inflation (2% in the case of the United States) is good for the economy.  Going higher than that results in the risk of an economy overheating.

Currently, interest rates are at historic lows as the country claws back from the pandemic-induced recession.  The Fed pushed rates down last Spring when the unemployment rate hit almost 15%.  While inflation was well under 2%, the Fed prioritized getting folks back to work.  Since then, as we’ve seen different data sets indicating economic recovery, there has been much discussion as to when the Fed will start “tightening” or boosting rates again.  Don’t look for this to happen any time soon as it will likely take a long time for the vaccine to roll out completely to allow a full recovery of the labor market.  The Fed would like to get inflation to that magical 2% level, but is more concerned with the employment side of the equation for now.  If, at this time next year, the unemployment rate has fallen to below 5% and inflation is still too low, look for the Fed to move.  Until then, they will want to keep rates low to encourage the economic activity which gets folks back to work. 

In economic releases this week, we saw the Weekly Initial Jobless Claims at 900k when 925k was expected.  Despite the enormity of this number compared to pre-COVID times, this was a drop of 3% from the previous week.  However, it is still an indication that the pandemic continues to ravage the hospitality sector.  More positive data came from the housing sector as buyers take advantage of low rates and flee the cities (rentals) for the suburbs (purchases).  Housing Starts were up 8% from the previous month and beat estimates by over 100k.  Building Permits also were up from the previous month by 4.5%.  And Existing Home Sales came in better than expected, improving on last month’s number by almost 1%.  Finally, the PMI Composite beat consensus on both the services (57.5) and manufacturing (59.1) side, indicating continued expansion in both.    

The markets took the dawn of the President Joe Biden era in stride as S&P 500 rose 1.9% for the week, the Nasdaq advanced 4.2%, ending at another record high of 13,543.  The yield curve steepened slightly this week as treasuries rallied across the curve.  2-year U.S. Treasuries closed at 0.12%, the 10-year closed at 1.09%, and the 30-year finished the week at 1.85%.

Key economic releases next week include Q4 GDP, Durable Goods, Weekly Jobless Claims, New Home Sales, Personal Income and Consumer Spending.