To sum up last week it was all about The Fed, Treasury Yields and February Winter Weather
- Treasury yields, particularly for the 10-year, continued to climb during week hitting growth equities - the Nasdaq and Russell 2000 - in the process.
- Comments from neither European Central Bank President Christine Laggard nor the Fed’s dovish post FOMC meeting comments that included not raising interest rates until 2024 and continuing its $120 billion per month in asset purchases did the trick.
- The Fed’s policy statement revealed an unanimous decision to not change the Fed funds rate and there was no change in the median estimate that the fed funds rate would remain unchanged through 2023.
- In his press conference, Fed Chair Powell said it wouldn't be time to start talking about tapering asset purchases until the Fed sees substantial further progress in meeting its employment and inflation goals -- "actual progress" and not "forecastprogress."
- He emphasized that the FOMC is not considering tapering, raising rates or changing policy for the time being.
- But the day after that, the 10-year Treasury resumed its upward climb, flirting with 1.76% before pulling back but still finishing the day higher.
Part of the reason for that was found in the Philly Fed's March survey showed the highest measure of prices paid in more than four decades.
Comments from Nike (NKE) made during the company quarterly earnings conference call late this week also point to short-term inflation drivers in the form of supply chain challenges, including global container shortages and U.S. port congestion.
Sticking with the pandemic, President Biden will achieve his goal of delivering 100 million vaccination shots in his first 100 days this week, less than 60 days into this presidency with the pace of shots hitting an average of nearly 2.5 million per day.
The Bottom Line is the Fed is likely to let inflation run hotter than usual to get employment closer to historical norms. This could mean the run up in Treasuries isn’t over yet, and investors we will have to watch the data to see if Powell or the market is correct when it comes to inflation and what that means for the federal funds rate,
- Predominantly housing but also Personal Income & Spending
- Housing will likely see a hit from the February weather but we’ll want to watch the YoY comparisons.
- Personal Income & Spending - likely to see a MoM decline as the impact of the December spending checks were really felt in January
Starting to hear more of the follow up for Biden’s economic agenda now that the $1.9 trillion relief bill is underway
Also following the first face-to-face meeting between US and China officials since President Biden's election, what’s next for US-China relations? Initial indications are the meetings were filled with bickering…. resembling a grade school lunch room in our opinion
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Lenore Hawkins, Chris Versace
Chris Versace 00:02
This is the week ahead brought to you by Advisorpedia and powered by Tematica Research. I'm Chris Versace Tematica as Chief Investment Officer and joining me as always, but yet this time from a very different location is Tematica’s chief macro strategist Lenore Hawkins, well, let's get this out of the way real quick. . .
Lenore Hawkins 00:22
Well, I landed in Dublin, Ireland, about less than an hour ago.
Chris Versace 00:28
Okay. All right. So we've seen a good Ireland. Here's the real question since you had sounds like copious amounts of time, probably turbulence and couldn't sleep anyway. were we able to watch the Snyder cut for the justice?
Lenore Hawkins 00:42
So far? Okay. I haven't made it all the way through. But I have to say the Snyder cut, it just blows everything else away. I it is one of the best ever. Not the best. I it's spectacular. So my response is as much as Zack Snyder is awesome in what he does, hashtag wieden sucks, I think will become very popular as a result of this movie, given what he mangled that original movie into. Oh, and since I don't know if you're, I can't do this very well. I don't know if your head or behind or whatever. timewise. I could tell you that the first episode of Falcon in the Winter Soldier, slow burn, slow burn. So excited. So this is the important stuff, but exactly, exactly when it comes in the market. Right.
Chris Versace 01:29
So let's let's let's talk about what happened last week as we get ready to talk about the week ahead. And I think if if I had to pick a couple terms to sum it up, I would say they would be the Fed. Treasury a lot. Yep. And February winter weather. And I think when we look back, you know, this past week was very much what we saw the prior week that stocks, particularly growth, your growth, your stocks are really reflecting what is happening with Treasury yields, particularly the 10 year,
Lenore Hawkins 01:57
Which I think we and we can't I think we also can skip that the pandemic is still having an effect, in that, while you look at the US and been Biden's 100 shots, or 100 million shots in the first 100 days is looking more like it's gonna get to 200 million in the first 100 days.
Chris Versace 02:18
Remember, just mark your calendar, April 9, that's when I get my second.
Lenore Hawkins 02:22
Excellent. So yes, the US isn't doing fantastic on that. Meanwhile, Europe is way behind. And this past week, a pace that was a snail's pace, got even slower with some concerns over AstraZeneca. That's all been cleared up. Now they're back to using AstraZeneca. But there was a bit of hubbub on whether or not that was going to be used. And what that all means for the markets is you've got a weaker Europe, and you've got the US looking ready to explode. that bodes well for where you're going to put your money in the economy that looks like it's gonna do great, or the economy that it's not so much because they still can't get it together. Well, that that's a great point. Right. And it's it's one of those things that I sit there and I listened to what you know, Powell is saying, which to me, when you put on the you know, Dick Tracy decoder ring
Chris Versace 03:15
It tells you that the Fed is probably going to entertain warmer, hotter inflation, because it continues to focus on that target of employment. And when we step back, and we think that we're starting to get checks, tied to the 1.9 trillion Biden relief plan, not necessarily stimulus plan, but relief plan. We're seeing better weather in March compared to February. And as we saw a February winter storms really hit a lot of the economic data was out last week from retail sales, industrial production housing starts, and will probably continue to hit it forthcoming February economic data as well. But again, the stimulus the relief checks, improving winter weather. You know, as we kind of joke before we started taping, the US continues to roll back restrictions, vaccination levels are going higher. I think there's a lot of, you know, positive momentum building in the US economy.
Lenore Hawkins 04:10
Let's just hope that spring break doesn't cause a problem with that. Did you see not taking it seriously. But you know, hopefully, hopefully, we will get this vaccine down. And by summer, as Biden was saying, things will be good. What was really interesting to me in the FOMC statement, was in light of all this investor sentiment around us hitting the roaring 20s. And all this inflation out there. There was just a tiny bit of lip service to the economy having quote turned up recently, but the Fed made absolutely no comments whatsoever on the run up and inflation expectations. And we went from five out of the fifth out of the 18 FOMC. Officials calling for at least one rate hike in 2023 to seven calling so that's really not that big of an increase. And at the end of the day, the Fed also really not that impressed with all of the Wall Street estimates for GDP that have been hiked up to like seven to 8%. For for this year, they did raise their rates from 4.2 to 6.5. But still stay in fight below the Wall Street estimates.
Chris Versace 05:20
So they were really given at the old Shania Twain bread twit lip service.
Lenore Hawkins 05:24
What have you done for me?
Chris Versace 05:26
You don't impress me much.
Lenore Hawkins 05:28
You don't impress me much. Yes. Praising my rock song. Yeah, yeah. So
Chris Versace 05:35
I mean, Powell was saying that they want to see actual progress, not forecasted progress. And some other things. But you know, you would have thought that that might have tempered the increase in treasuries again, particularly the 10 year, but it did not. Now, there was a piece of data that came out the very next day. You're talking to Philly?
Lenore Hawkins 05:56
Chris Versace 06:01
Cheesesteaks. So it was in there, the Philly fed March survey, and it showed me get this here correctly, the highest measure of prices paid in more than not one. not two, not even three, four, counting for decades.
Lenore Hawkins 06:17
Yeah, it was. The headline was expected to increase all of point nine. And instead of increasing point nine, it increased 28.7. That was the largest one month game.
Chris Versace 06:28
Now that's the overall number.
Lenore Hawkins 06:30
All right. Okay. Overall, yeah, just the overall headline it was it was amazing. It the The only other one that we've seen that big was last June. But that's kind of an anomaly, right? If you haven't walked down, then opening back up. Pretty much all of the sub sectors within that were all fantastic. For example, inventory builds were the 99th percentile of all time. What I thought was really, really interesting, though, is if we compare what came out of the Philly report to Thursday's unemployment report, so that was another one we got Thursday's unemployment report. While Philly was a really happy surprise, the unemployment report was not an initial jobless claims were expected to hit a new low for the pandemic. But instead of dropping to 700,000, they actually rose to 770,000. Now, that's the highest reading since the week of February 12. So instead of seeing things improving, they got worse now. Take that. And let's combine that with affiliate report. And 64.3% of respondents reported a shortage in labor. So let me get this straight, we still have only about a little over 50% of the jobs lost have been recovered. And yet, according to Philly fed report, they can't find labor, just under 60% said that there's a skills mismatch, about 45% said that they have job vacancies that have been open for more than three months. So again, we're dealing with really high unemployment, we're dealing with roughly 9.5 10 million people out of work, and yet they can't find jobs. Only 8.9% of firms reported that they're actually finding qualified candidates, and more than 25% reported seeing a significant shortage in qualified candidates. So this is something you and I have been talking about a lot, that we really have a structural problem in the employment market. And it is much more complex, and just getting the economy going and people getting jobs, we were already having that problem before the pandemic hit that the pandemic really accelerated this by bringing forward the adoption of a lot of automation. And it goes automation from the corporate side, where you're using more technology to automate more and more white collar jobs to automation in manufacturing plants. Right?
Chris Versace 08:49
Absolutely. I was gonna ask, did you how much you think it was that mismatch between skills versus we have seen in the past? I can only call it this. And I'm sure you'll get what I'm saying. Government math, and discrepancies between how different reports are categorized but it doesn't sound like
Lenore Hawkins 09:08
No, I mean, we've been saying that there's a lot of other private sector reports that come out, I have been saying similar things that they're the companies really are having a tough time finding the right person for the job. So there's, there's jobs out there, you just can't hire for them. So that says a lot of really interesting things about what we're going to have to do with re educating people and building new skill sets.
Chris Versace 09:28
Well, I think of the restaurant industry that has accelerated, you know, digital sales, mobile ordering that sort of thing over the last year. That's not necessarily the skill set to program that in initiate that is not necessarily the same as let's just say your average server, just just not there. Now, did you see the Nike earnings report?
Lenore Hawkins 10:00
Well, this is kind of your thing.
Chris Versace 10:08
I get it jetlag, you don't want to steal my thunder I get it. So, you know,
Chris Versace 10:13
I pile through these calls for when we do the NASDAQ daily markets note and the something really jumped out at me were Nike was saying that they saw their us business disrupted really because of supply chain challenges in you know,
Lenore Hawkins 10:28
Really we've talked about that a lot.
Chris Versace 10:30
Yeah, right. But really pointing to two things, global container shortages, which you don't really hear about that often.
Lenore Hawkins 10:36
I know that we've talked about that before, because that's been the problem with, you've got all these ships that are in the wrong place, you have all these empty container ships that are the wrong place, because supply chains got all thrown up, thrown apart. And then you've got because of the pandemic, you can't get that many people working in the ports next to one another. So you have all these ships lined up with little containers to drop their things off, and they just can't get cleared fast enough. So you got a huge backlog there. Across the board, you've got problems with guys saying weeks ago, some furniture companies in Italy are having the same thing where they're saying that they're their freight costs are like 10x peloton recently sent an email out to their customers saying that their shipping costs are roughly 10x of what they used to be, because nothing's in the right place. And it's going to take if that's what you're talking about with this inflation, but be very careful of the suppose inflation data that we see coming up. Because with those supply chains, being really disrupted shipping costs are astronomical compared to what they normally are, that's going to get fed into prices. But that's going to work itself out once everything's kind of back in the flow of the way it used to be.
Chris Versace 11:49
See that listeners, it really does pay to listen to what the High Priestess of global macro says during these conversations. Okay, so the point being that Nike and their comments regarding supply chain challenges is just another indicator that we're likely to see some near term, but likely short term inflationary pressure, which which they thought helps contribute to the rise late in the week of Treasury yields. But there was something else that spiked the Treasury yields. And I don't know if you saw this, because I know you're in transition. But if so the Fed came out. And they said that they're not going to extend a pandemic error rule that allowed banks to relax capital rules, that that pandemic style error rule expires at the end of March. And the thinking is, this is going to prompt banks and other financial institutions to sell treasuries, which will likely drive yields even higher in the short.
Lenore Hawkins 12:47
Yeah, it's a bit it's a bit of a tapering almost is it's a bit of a de facto, and I think there's a lot of surprise that they actually did this. Because he when the during the FOMC meeting, it was not expected. There was questions around this. All the Fed did was respond with a pre planned announcement that we'll get to this later. And then they announced I'm surprised that they did it now. But they announced it just this morning, Friday morning. Sticking to the script.
Chris Versace 13:22
I think the bottom line, you know, as we said earlier, the Fed is going to let inflation run a little hotter, so it can get closer to its so I get employment closer to historical norms. likely means the run up in treasuries probably not over yet.
Lenore Hawkins 13:35
Chris Versace 13:37
And I think it means that as investors, you're going to want to watch the real data, just like Powell said, What's the actual data telling us versus what's the expected or forecasted going to say, but at the end of the day, you and I both know, the data does not lie. And based on that, we'll figure out what's gonna happen with inflation and with the Fed has to do with the Fed funds rate?
Lenore Hawkins 13:58
Chris Versace 14:00
Okay. All right, the next week, let's do that. So I, you know, we kind of said earlier that a lot of the economic data has been hit by the winter storms in February. I think we're gonna see that again. Next week, though, you know, it's a real shift in the data, I would, I would bucket it into three things. Sorry, two things. The first is going to be a lot just more housing data, existing home sales for February, new home sales for February, again, likely to see impacted by the winter storms, but
Lenore Hawkins 14:32
But also, when you look at those look at them by region, because it's been a little popular to say that this has been the weather and granted if you looked in the areas that were hardest hit by the weather, there were big hits to those sales. But if you looked over in the West, where you didn't really have any weather problems, there's also decline. And I think what we're seeing is the impact of rising rates is affecting mortgages.
Chris Versace 14:59
I think that Right. I think that's right. I also want to you know, I meant to bring this up sooner, and I didn't. But since we're talking about economic data last week and the coming week, a lot of the reports that we got the headline commentary around that is month over month, right? Yes, they're comparing February. Yeah. Now, I understand people like to do that. Because I tend to look at companies and I tend to be looking at revenue growth on a year over year basis or earnings growth on a year over year basis. I try to look at the data, the economic data, as well on a year over year basis. And when I did that, retail sales for February, weren't all that bad. housing starts, housing starts. Were actually up mid teens,
Lenore Hawkins 15:45
You're Oh, yeah. No, on a year over year, they're still quite good. It's just are we seeing a change in direction?
Chris Versace 15:52
Hmm, I got it. No, I understand that. Look, there's a triangulation between the two ways to look at it.
Lenore Hawkins 15:58
No, you can't, you can't look at just one or the other, you really need to do exactly to your point, you needed to go year over year to say, well, where am I in the big picture? And then the month over the month kind of gives you more of a well, what's kind of the momentum here? More margin? Exactly. And even with that with the month over month, I kind of like to do maybe a three month
Chris Versace 16:19
Lenore Hawkins 16:20
Yeah. Yeah. Makes because you get you can get monthly spikes.
Chris Versace 16:24
Oh, absolutely. Absolutely. So I think it'll be important to look at existing home sales, new home sales as well on that year over year basis. And then the other one that I want to watch is going to be the February personal income and spending report. Yes, again, consumer directly, indirectly, two thirds of the economy. But here's the thing, even though I was just saying year over year, I do expect the personal income to fall and personal spending to fall on a month over month basis. And the simple reason is January, spending, which we saw on retail sales as well benefited so much from those December estimate, excuse me, December, stimulus checks. And we already heard companies from Visa MasterCard saying that January was great. February was a little more normalized. So I think we're gonna see that turn up in the data. Anything I missed that you might want to call out?
Lenore Hawkins 17:13
No, I think another thing to look at when we're looking at that, that spending an income and as you're saying when these checks go out, and you get the spikes in spending? It this makes me think about the cash for clunkers program. If you remember that, right. It was were we talking Wait, wait,
Chris Versace 17:32
Are we talking jobs created or saved now?
Lenore Hawkins 17:34
Yeah, well, what we're talking about is, is this really pulling forward demand these bikes and spending is that just like we saw with cash for clunkers, you saw this fantastic auto sales during the cash for clunkers program, because people were like, Hey, I can get a new car for a lot less. But what that was doing was people were gonna buy a car in the next couple of years. And instead of doing it in the next couple of years spread out, it was happening all the ones, we could be seeing a lot of demand that's really being pulled forward, which I think the feds also looking at to that in as the stimulus tapers off. And how long are we going to have to keep doing these big, huge injections into the economy? is after you stop them? Are things going to slow down again.
Chris Versace 18:20
Yeah, I I agree. I agree. It might not be the only it looks with this way. Inflation may not be the only temporarily hot thing that we have to watch for. Exactly. Okay. All right. On the earnings front, it's a really thin week. There's only I think, a handful of companies to really talk about a GameStop. Well, we'll get to that. Just hang on. So you got Adobe GameStop on Tuesday, General Mills, Winnebago KB home and the old Restoration Hardware, now known as Rh on Wednesday, and then Darden on Thursday. Now you seem very hot and heavy on GameStop. Go right ahead.
Lenore Hawkins 18:58
Well, you know, get who doesn't who doesn't want to know what's going on with GameStop, it's amazing how you have a stock price. So completely disconnected from the underlying company, although it's not the only one I have to say out there, but it'll not at all. it'll be interesting, though, to hear from Winnebago what's going on with them because they've got so hot during the pandemic, and when it was really bad, right? Because everybody's saying, well, I can't, I can't get on a plane. I'm not gonna stay in the hotel. I’ll get a Winnebago … and that could be another pull forward in demand, right?
Chris Versace 19:32
Possibly, possibly, you know, Camping World reported, I think a week or two ago and Thor industries which also serves that marketplace. And they're all talking about rising demand. So yeah, I expect Winnebago will have at least a good print for the quarter, maybe a good one to quarter into sorry, good forward one or two quarters in terms of guidance, but what we'll see what they say about the full year, just circling back to GameStop. I have one word that I really hope happened. With that stock ready, defrocked? That's what I? Yeah. Because to your point, you know, when you look at the valuation of the shares the volatility of the shares over the last, you know, several weeks, largely inspired by that Reddit group, you really have to wonder, like, do these people even know the business model?
Lenore Hawkins 20:20
The Android doesn't matter? Yeah, this models overall, no, no.
Chris Versace 20:23
But this could be a time and it happens, you know, from time to time that reality actually catches up with something.
Lenore Hawkins 20:31
Well, you look at gamestop. Compare that to our age where they have done a fantastic job with the actual underlying business, and they have been rewarded for that they they've continued to outperform. And I'll be really interested to hear from them, what they see going forward. Do they suspect that they've had a real pull forward in demand? And do they think that in the coming quarters, they may get less than they would have otherwise expected because everybody was sitting at home going, I have to get rid of this couch?
Chris Versace 21:03
Yeah, you only need so many couches, only so many tables. So the last major one is going to be Darden. And the reason that I'm kind of looking at that is how do they see the Biden relief checks kind of playing out on their business? How do they see their businesses opening up? As these restrictions continue to decline? Right. And it's just funny to me that, you know, there's a lot of kids around the country that are going to school, but Walt Disney World is opening priorities. True, true. Okay. All right. And then the just outside of economics and earnings. The other thing I think we should just touch on really quickly is Washington that's going to be back and focus yet again. Yes, we talked about it several times, the 1.9 trillion relief bill is underway and getting disseminated. The neck Next up is going to be the follow up economic plan from Biden, which seems to be really centered around infrastructure. But but that's the wrinkle, though, right? You know, they're going to try and push through one of the first federal tax hikes and in how long …
Lenore Hawkins 22:08
Right now a little bit like the Lord, give it them the Lord take it away.
Chris Versace 22:14
Yes, it does,
Lenore Hawkins 22:15
That really is driving with it's driving with one foot on the brake, because if we're doing all the stimulus on one hand, but then we're going to you have to do they did have they did?
Chris Versace 22:26
Okay. Well, my concern is that it could take what should have been a across the aisle measure infrastructure, and it's going to make it a very partisan one because of the tax hikes.
Lenore Hawkins 22:40
I think so. And I think we are going to be seeing more of this all over the world, frankly, too much of the developed world because all this stimulus is gonna have to get paid somehow and you just can't print all of it. Okay. Okay. So
Chris Versace 22:53
You mean tax hikes?
Lenore Hawkins 22:54
Yeah. tax hikes.
Chris Versace 22:55
Okay. One point I'm like, what, what more inflation would sorry, more infrastructure. Okay, so I agree with you that and then, you know, exiting. Last week, there was the first face to face meeting between US and China officials regarding trade under the Biden administration. And I could not believe what I was reading. How these guys were bickering like, I mean, it sounded like a great school lunch room. Don't touch it. You don't know what you're doing.
Lenore Hawkins 23:27
Boom, did say the Bible that it takes one to know one. I know but this is the China they don't do they use that geopolitics have become just painful. So that's why we just tried to focus on the markets but it to your point, like us China relations getting dicey, again, as a headwind, to a lot of parts of the economy. Well, the pause.
Chris Versace 23:48
I mean, I agree that it's an extremely let's just call it like dating. It's a very complex relationship. And I'm hoping that it's not played out so much in the media, like it's been for, you know, as well, you know, not as long as I can remember, but it sure feels that way. So yeah. And I think Lenore if I'm not mistaken, that's the week ahead
Lenore Hawkins 24:12
The week ahead.
Chris Versace 24:13
You get to work on your timing.
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