Stimulus 3.0 and February CPI Report

The Senate made quick work of the third stimulus bill passing it on Saturday and now it returns to the House where it will likely be passed without changes and then head to the president’s desk for signing into law. The haggling over stimulus check income limits took some time, as did the amount of unemployment benefits ($300 per week) but in the end all Democrats stood together to pass the measure and give President Biden a significant legislative win early in his presidency.  With the $1.9 trillion bill set to become law and add to the economic momentum already in place, Treasuries are under pressure again as the week opens. The other big item this week is the latest read on inflation, and while Treasury yields are up in anticipation that we’ll start to see it creeping into the numbers, February is not the month it will happen. Core YoY CPI is expected to remain unchanged at 1.4% but the depressed numbers of March and April of 2020 will soon roll out of the calculations and a spike should follow. The Fed says to ignore it, it’s transitory, but will the market? Finally, fresh long-end Treasury supply should keep yields up until buyers are found for the new debt.

 


Treasuries
Treasury Curve Today Week Change
3 Month 0.04% +0.01%
6 Month 0.05% Unch
1 Year 0.07% Unch
2 Year 0.15% +0.02%
3 Year 0.32% +0.05%
5 Year 0.83% +0.11%
10 Year 1.60% +0.16%
30 Year 2.30% +0.10%

 

Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.19%
6 Mo LIBOR 0.20%
12 Mo LIBOR 0.28%
Swap Rates
3 Year 0.440%
5 Year 0.925%
10 Year 1.641%

 

Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Mar 9 NFIB Small Business Optimism Feb 96.3 96.5 95.0
Mar 10 CPI (MoM) Feb 0.4% 0.4% 0.3%
Mar 10 Core CPI (MoM) Feb 0.2% 0.2% 0.0%
Mar 10 Core CPI (YoY) Feb 1.4% 1.4% 1.4%
Mar 11 JOLTS Job Openings Jan 6.600mm 6.650mm 6.646mm
Mar 12 PPI (MoM) Feb 0.4% 0.4% 1.3%
Mar 12 PPI (YoY) Feb 2.7% 2.7% 1.7%
Mar 12 U. of Michigan Consumer Sentiment Mar P 78.0 78.0 76.8
Mar 12 U. of Michigan 1yr Inflation Expected Mar P 3.3% 3.3% 3.3%

 Top 5 Events for the Week

Mar. 8 — 12, 2021

1. Will Stimulus 3.0 Become Law — All Week
2. February CPI Report — Tuesday
3. Treasury Auctions — Tue/Wed/Thurs.
4. January JOLTS Job Openings — Thursday
5. March Univ. of Michigan Sentiment — Friday

 

1.  Biden Stimulus 3.0 Set to Become Law — All Week

The Senate made quick work of the third stimulus bill passing it on Saturday and now it returns to the House where it will likely be passed without changes and then head to the president’s desk for signing into law. The haggling over stimulus check income limits took some time, as did the amount of unemployment benefits ($300 per week) but in the end all Democrats stood together to pass the measure and give President Biden a significant legislative win early in his presidency. With the $1.9 trillion bill set to add to the economic momentum already in place Treasuries are finding it tough going as the new week unfolds. Expect little reprieve in the trend to higher rates this week, especially with new Treasury supply adding to the pressure.

 

2.  February CPI Report — Tuesday

If you look at rising TIPs inflation breakeven rates there’s little doubt investors believe the new stimulus, and increasing rates of vaccinations, will boost the economy and inflation in short order and longer-end Treasury yields have been hitting yearly highs in anticipation. We continue to be a little more skeptical that inflation gains a durable foothold in 2021 but when March and April of 2020 roll off the calculations there will be a pop, but as the Fed says that is likely to be transitory.   For February, overall CPI is expected to increase  0.4% versus 0.3% the prior month. The core rate (ex-food and energy) is expected to increase 0.2% versus an unchanged reading in January.  CPI (YoY) is expected to jump to 1.7% after last month’s 1.4% result. Core CPI (YoY), however, is expected to remain unchanged at 1.4%.  As mentioned, expect the numbers to pop after March and April of 2020 roll off but that spike will be ignored by the Fed. The question is will the Treasury market ignore it as well?

 

 

3.  Treasury Auctions — Tuesday/Wednesday/Thursday

This week includes three Treasury refunding auctions which will test the ability of the market to take down new supply in the face yields that have definitely been on the back foot lately. Tomorrow $58 billion in 3-year notes will be auctioned, $38 billion in 10-year notes on Wednesday, and $24 billion of 30-year bonds on Thursday. While yields have hit yearly highs on the longer end it will be informative to see if additional concessions (read even higher yields) will be necessary to entice sufficient buyers.  Expect the market to trade heavy this week until we get the auctions past us and the new supply is put away. So yes, another week of higher yields seems likely and that’s how the early trading is pointing.

 

4.  January Job Opening and Labor Turnover Survey — Thursday

The labor market seems to have got some momentum back in February after a negative print in December and a so-so January. The JOLTS Job Openings Survey provides some additional details that are not in the more famous BLS Employment Report even though the report is a month behind the information will be of interest to policy makers and investors. Expectations are for 6.650 million openings versus 6.646 million in the prior month. The Quits Rate will be checked as well as it measures the confidence level of workers who voluntarily leave a job in search of a better one. The rate rose to 2.3% of all workers in December which equals the rate a year ago. It dipped as low as 1.4% in April 2020, so it seems worker confidence is returning to the level it was pre-pandemic.

 

5.  Preliminary March Univ. of Michigan Consumer Sentiment — Friday

Two-thirds of the US economy is consumption-based so gauging consumer sentiment is crucial to determining how they feel about spending, especially as virus cases trend lower and vaccination rates climb. For March, the Bloomberg consensus is for sentiment to be 78.0 up slightly from February’s  76.8 reading while consumer expectations edge higher to 88.3 versus 86.2 in February. The sentiment index peaked at 101 a year ago and bottomed at 68.0 in April. So while there has been improvement off the lows, sentiment appears to be settling in the 80 range but given the better news on the jobs and virus front, it seems likely sentiment is poised to move higher.

 

 


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Published: 03/08/21 Author: Thomas R. Fitzgerald