Treasuries Ignore Strong Economic Numbers, For Now
Treasury Rally Continues Despite Strong March Numbers
The market received a boatload of data yesterday that was unambiguously strong and Treasury prices curiously rallied in response. After reaching a pandemic high yield of 1.74% on March 31, the 10-year note has rallied throughout April dipping to 1.55% yesterday. That’s a level last seen on March 11. From retail sales, to initial jobless claims (discussed more below), to Empire Manufacturing, and on, the reports all painted a picture of a consumer and economy that is shifting into a higher gear with plenty of horsepower in reserve. Several reasons have been offered for the seemingly incongruous price action from Japan stepping back into the market as a size buyer after their fiscal year-end of March 31 passed, to excessive short bets that are now being painfully unwound, to a consolidation of the previous months-long bear trend. It’s probably a combination of all those and more, but it seems given the strength of recent economic releases that the rally is only a pause before rates start to head upward again.
Stimulus Checks Fuel Surge in Retail Spending
Fueled in part by $300 billion in stimulus checks, retail sales for March blew the doors of estimates with a month-over-month gain of 9.8%. The increase in spending was second only to the 18.3% surge last May as the economy started emerging from the self-induced coma. While the stimulus checks certainly aided the cause, sales were also helped along by better weather and increased re-openings. The checks were certainly a lifeline to some but to others it was a windfall that led to a surge in discretionary spending. Categories that had huge gains were autos (+15.1%), electronics (+10.5%), clothing (+18.3%), sporting goods (+23.5%), department stores (+13.0%), and restaurants/bars (+13.4%). Those gains strongly suggest consumers left the confines of their homes and sought to enjoy some of the government’s largesse.
With all three months of the quarter now in, total retail sales surged 34.7% on a quarterly annualized basis, while the control group—a direct feed into GDP calculations—rose 27.5% for the quarter. With two-thirds of the economy tied to consumer consumption the gain in spending will likely result in a raising of first quarter GDP estimates. The current Bloomberg consensus has GDP rising 5.4% for the quarter and 8.1% in the second quarter. Expect the first quarter estimate to get a bump after yesterday’s retails sales numbers.
Initial Jobless Claims Posts New Pandemic Low
Retail Sales wasn’t the only report yesterday that reflected a rebounding economy as initial jobless claims also posted a better-than-expected number. For the week ending April 10, applications for U.S. unemployment benefits plunged by 193,000 to 576,000 marking the lowest level since the pandemic struck the economy last year. Claims had been expected to be 700,000 while the prior week was adjusted higher to 769,000. It’s been one of the peculiarities of the recovery that while the monthly jobs reports have been posting solid and sometimes huge gains in new jobs, weekly unemployment claims have been stubbornly above the 600,000 threshold since the pandemic. So this latest print may represent a breaking of that barrier as the economy continues to re-open and customer-facing businesses come back on line and retain their employees rather than be forced to let them go.
Unused Vaccines Piling Up in Places
One of the factors driving the strong economic growth estimates this year is the rapid adoption of COVID-19 vaccines across the country, leading, hopefully, to the promised land of herd immunity. So it’s more than a little disconcerting to see reports that some states and cities are already experiencing a growing surplus of doses in a sign that demand may be slowing in those regions. In fact, some states are reporting one in three doses are now going unused. Add in the recent Johnson & Johnson news and it will only be tougher to convince the reluctant to get the shot. If this trend continues the implication is that reaching herd immunity and declaring victory against the virus will, at best, be delayed, with the possibility that flare-ups continue and slow the pace of the economic recovery.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.01%||Unchanged||1 Mo LIBOR||0.11%||Unchanged||FF Target Rate||0.00%-0.25%||3 Year||0.461%|
|6 Month||0.04%||Unchanged||3 Mo LIBOR||0.18%||-0.01%||Prime Rate||3.25%||5 Year||0.900%|
|2 Year||0.16%||Unchanged||6 Mo LIBOR||0.22%||+0.01%||IOER||0.10%||10 Year||1.547%|
|10 Year||1.56%||-0.10%||12 Mo LIBOR||0.29%||+0.01%||SOFR||0.01%|
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