March 22, 2021

Weekly Market Commentary March 15th to March 19th 2021

The spotlight was on the Federal Reserve again this week and they continued to stress that interest rates will be held at their current historic lows in order to improve the employment situation brought on by the pandemic; and to push inflation towards their 2% target. Economists, investors, and other market followers poured over the statements made by the Fed looking for clues as to when they will begin to tighten. So far, the answer is a simple one…until the employment situation improves followed by inflation getting to two percent or higher, don’t look for any moves. The Fed would like to see the unemployment rate back under 4% before they’ll consider raising rates. And even if/when that happens, they have re-stated their desire to have inflation “average” 2%, which means actual inflation could hit and surpass 2% without any moves by the Fed. Look for steady low short-term rates through 2022 and likely into 2023. As far as longer-term rates, they are less dependent on the Fed and more on market reactions. With the passing of the $1.9 trillion stimulus package and the return of SOME inflation, the fixed income markets have been rattled which has driven up longer yields.

In economic releases this week, we saw more regional manufacturing improvement with the Empire State Index beating consensus and coming in well above February’s number. The Philadelphia Fed Manufacturing Survey walloped the forecast, coming in at 51.8 when the survey range called for 19 – 30. However, two national measures, Industrial Production and Capacity Utilization, both disappointed slightly.

On the consumer side, February Retail Sales were off their January highs, but this was somewhat expected due to the poor weather in February and the lofty January number. Look for strength in retail sales going forward as stimulus checks start hitting bank accounts this month. In real estate news, both Building Permits and Housing Starts where lower than anticipated, also likely due to the spate of nationwide winter storms in February.

Lastly, Weekly Initial Jobless Claims saw an unexpected increase up to 770k last week, bucking the recent trend of falling clams. Although still under 800k, it was expected to be much closer to 700k and was the highest number in over a month. As mentioned earlier, the Fed will not consider raising interest rates until the employment situation improves, and the frontline measurement is Weekly Jobless Claims. We would all like to see this number gradually trend lower towards pre-pandemic levels in order to be confident that the economy is truly moving on from COVID-19.

In the markets, stocks came off their highs last week and were rattled by increasing bond yields as investors took profits mainly on tech stocks. The S&P 500 was down -0.8%; the Dow Jones Industrial Average was down -0.5%; and the tech-heavy NASDAQ finished the week lower by -0.8%.

Bonds also took a beating as fears of future inflation took hold. The 2-year U.S. Treasury yield finished flat on the week at 0.15%; the 10-year closed at 1.73% which was up from 1.63%; and the 30-year ended the week at an 18-month high of 2.44%, up from 2.40% last week.

In next week’s economic releases, look for New and Existing Home Sales; Durable Goods; the Markit Manufacturing and Services Indices; a fourth quarter GDP update; Personal Income and Consumer Spending; and of course, the Weekly Initial Jobless Claims.