Treasuries have managed to navigate a second straight week absorbing copious coupon supply without too much indigestion. This time it was 2yr, 5yr, and 7yr notes. The 7yr yesterday was particularly of interest because the February auction was the worst ever for that maturity. This time it struggled again but not to the extent last month so we’ll take it and move on.  Treasuries now enjoy two straight weeks without having to build in pre-auction concessions and that should provide a positive backdrop that could see continued rallies across the curve. Meanwhile, personal income and spending for February are due this morning and it’s likely the calm before the deluge of stimulus checks that hit this month and next.

 


Economic News

Certainly one of the more interesting phenomena coming out of the pandemic response has been the steep increase in personal savings rates for US consumers. The graph below tracks the personal savings rate going back to the mid-2000’s recession. Most of us can recall Americans routinely being lectured about not saving enough and being profligate spendthrifts. Well, the pandemic sent that  stereotype scurrying as the savings rates peaked at 33.7% of disposable income last April as the first stimulus checks hit and most recently it was 20.5% in January as the second round of checks were deposited.

The savings rate will get another boost in March and April as the third stimulus checks arrive. While banks have been beneficiaries of this liquidity the question is when will the consumer revert to prior form and begin spending all that savings like a drunken sailor on shore leave? We think begins soon. First, the pandemic is clearly on the defensive with vaccinations spreading across the country, and service companies are reacting by reopening at levels not seen in a year. Thus, the consumer is likely feeling better about their situation now versus a year ago, and with bank accounts swelling, and pent-up demand being what it is, expect the second quarter into the summer to be one of huge consumption. Will the expected surge in spending drop the savings rate to the 6.9% 200-month average as shown above? Probably not, but those double-digit savings levels are probably  a thing of the past. The real question is after the expected second and third quarter surge do we return to a pre-pandemic level of spending, or is that also a thing of the past? We think those that didn’t suffer much in the K-shaped recovery will return to their pre-pandemic levels, if they ever left them, while those that did suffer will long remember and keep the rainy day fund a little larger than before. That seems to speak to a more durable restraint in spending such that long-run consumption might struggle to return to pre-pandemic rates.

 


Expect Consumer Spending to Surge in the next Two Quarters then Taper

Continuing with the question of consumer consumption, how much will be with us after the surge of stimulus check-inspired spending is a thing of the past? Certainly, getting those 9.5 million still unemployed back working will help and returning some of the 4 or 5 million who left the labor force over the last year will also help and that’s a big reason the Fed will remain patient and accommodative certainly into 2023.  The table below is the Bloomberg consensus forecasts from more than 80 contributors. As shown, quarterly GDP annualized for this quarter is expected to be 4.8% with consumer consumption at 5.1%. Second quarter and third quarter are expected to be even better at 6.9% and 7.0%, respectively. Those eye-opening GDP growth rates will be thanks to consumption spending in those quarters of 6.6% and 6.9%, respectively. Compare those levels to the 20-year consumption average of 2.3% which is similar to the GDP average over the same period of 1.8%.  Recall that two-thirds of GDP is consumer spending so it stands to reason they will never be far apart. Thus, the spending surge is likely to hit in the next two to three quarters then slowly revert to the mean. That’s another reason the Fed remains rather sanguine about the expected near-term spike in inflation. They don’t see the forces building that will make it more durable.

 


US Dollar Continues Strengthening

One of the forces pushing Treasury yields higher this year has been investor conviction that all the fiscal and monetary stimulus is bound to be inflationary. That has led to unrelenting increases in inflation expectations as reflected in TIPS breakeven inflation rates hitting multi-year highs in the 2.29% – 2.65% range. One factor driving that increase in the past year has been the fall in the dollar and the rise in commodity prices. Recently, however,  commodity prices have headed lower while the dollar has been on a quiet three month strengthening trend. If that continues it will continue to ease commodity prices and cheapen import prices. Again, while near-term inflation is expected to spike, longer-run dynamics appear rather modest.


Market Rates

Treasury Curve Today Chg Last Wk. LIBOR Rates Today Chg Last Wk. FF/Prime Rate Swap Rates Rate
3 Month 0.01% +0.01% 1 Mo LIBOR 0.11% Unch FF Target Rate 0.00%-0.25% 3 Year 0.450%
6 Month 0.03% Unch 3 Mo LIBOR 0.20% +0.01% Prime Rate 3.25% 5 Year 0.959%
2 Year 0.14% -0.01% 6 Mo LIBOR 0.21% +0.01% IOER 0.10% 10 Year 1.707%
10 Year 1.68% -0.06% 12 Mo LIBOR 0.28% Unch SOFR 0.01%

 

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Published: 03/26/21 Author: Thomas R. Fitzgerald