It was a relatively quiet week in the markets… and for market performance these days, no news is good news, as the market posted a 2.7% gain for the week, as bond yields fell slightly. This also softened mortgage rates. On the not so good news front? New jobless claims were up again, and virus cases are on the rise again too. For more finance news, you can find all the previous Monday Market Update’s here. You can now also get the finance news of the week every week on Finance Explained, my new podcast, along with a deep dive on a topic relevant to the week’s headlines.
Monday’s Finance News of the Week
The overall market sentiment thorughout 2021 continues to be driven by two key themes:
- Stock market rallying on hopes of recovery
- But tempered by rising interest rates fueled by inflation concerns
Last week, with minimal financial news, interest rates fell slightly, and the market rallied as recovery hopes outweighed inflation concerns.
The S&P 500 closed at a new all-time high Friday, for the second week in a row, despite higher jobless claims and rising virus cases in what some experts are warning could be a 4th wave. The market finished the week up +2.7%, it’s second best weekly performance for the year. The S&P 500 is now up +9.9% year-to-date. Last week, as mid-term interest rates softened, the market rallied, led by tech and growth stocks. The Nasdaq was up 3.9% and Growth stocks up 4.0%, after underperforming with rising interest rates for most of the year.
With the down-tick in interest rates, we also saw 30-year mortgage rates tickdown as well, after nearly 2 months of increasing, now at 3.13%, down 5.0bps from the week prior, still near historic lows, but nearly back to pre-pandemic levels. More on mortgage rates below.
It’s important to note that interest rates softening last week is likely just a temporary pause – not a trend expected to continue – given growth and inflation expectations. Where are we seeing inflation expectations? A major inflation indicator is the 10 Year Treasury to TIPS spread. Ten-year TIPS yields are currently negative, meaning current actual long-term interest rates are lower than expected inflation. The Treasury spread to TIPS continues to hold steady well above 2%, ending last week at 2.32%. This spread historically has predicted inflation growth about a quarter ahead of time, and at current levels, estimates inflation of about 2% for the coming quarter (vs. latest level for February of 1.7%). It should be noted the Fed’s own estimates for 2021 inflation now sit at 2.4%.
Last Week in the Markets
While for most of 2021 we’ve seen recovery hopes and inflation concerns drive outperformance of cyclical, small cap and value stocks over growth and tech stocks, we’ve seen a shift the last two weeks. Growth and tech stocks rallied for the second week in a row, up +4.0% and +3.9% for the week, respectively. The two week growth and tech rally accounts for nearly the entirety of their year-to-date index performance.
In the bond market, you can see a similar outperformance of higher risk securities year-to-date, as investors have sought higher sources of return. High Yield bonds, with lower credit and higher interest rates, have significantly outperformed Investment Grade and Treasury bonds year to date, though all bond indices are now flat to down year-to-date, as rising yields drive prices down. As mid-term rates have softened in the last week, we’ve seen bond market performance take a bit of a pause. For more on the inverse relationship between bond yields and bond prices, see 10+ Different Types of Investments under How Bonds Work.
The rise in the longer-term end of the current yield curve since the start of the year has driven the price of bonds down significantly. Long-term rates held relatively steady last week, but mid-term rates, where we’ve seen rates increase the most year-to-date, softened slightly. This more steeply upward sloping yield curve is representative of a more normal, growing economic environment, but also a result of inflation expectations and expectations of more government borrowing in the short-term. Compare it to the yield curve last March, an inverted curve, when long-term Treasury rates hitting their lowest levels ever, which is predictive of a recessionary environment.
Concerns over inflation, and the rapid growth in the money supply, have fueled the rise in more speculative investments, like commodities and cryptocurrencies, like Bitcoin. Want to know more about what’s driving inflation concerns? Check out this post on Higher Inflation. Bitcoin performance moderated a bit last week in the face of a more stable interest rate environment.
The Economic Weekly Market News
This week’s major economic releases included:
Weekly Jobless Claims
While the monthly employment report gives us far more insights into demographics and industry breakdowns of the labor market, Weekly Jobless Claims gives us more real-time data on the labor market’s progress. On Thursday, weekly jobless claims for the week ending 4/3 increased to 744,000 from the previous week’s upwardly revised level of 728,000. Every week, most economists expect to see signs of improvement – but so far, they continue to show signs of a stalled labor market recovery.
Total insured unemployment, under regular state programs, is down to 3.7 million people, an insured unemployment rate of 2.6%. However, this remains only a fraction of those covered under the expanded pandemic and emergency programs at both the state and federal level.
Total insured unemployment under these programs for the week ending 3/20 (this comes at a longer lag) is far greater – 18.2 million, this week down by just over 50,000 continued claims vs. the week prior, and seems to have finally stabilized. This total had bounced around a lot in recent weeks. I’m not entirely sure why – if it’s due to the timing of benefits expiring before being extended or something else. The PEUC, or Pandemic Emergency Unemployment Claims, where we see the biggest decline in continued claims, is an extension of unemployment benefits for up to 24 weeks after someone has exhausted their state benefits. These were previously slated to expire last week, but under the American Rescue Plan Act officially passed into law last month, the expanded Federal benefits programs are now extended to the end of August.
Big picture: this is really what insured unemployment looks like – and you can see how continuing claims show essentially a stalled labor market based on those collecting unemployment insurance.
Weekly Mortgage Rates
Let’s chat about mortgage rates… with the housing market on fire, lower mortgage rates continue to support increased demand and make higher priced homes more affordable. Freddie Mac publishes the results from its Primary Mortgage Market Survey every Thursday, giving the weekly US average for 30 Year Mortgage rates. As of 4/8/2021, the average 30-year rate was 3.13% with 0.7 points, the first tick down in 2 months, but still up +0.46% since the start of the year, and almost back to pre-pandemic levels.
I talk a lot about what’s happening with interest rates – and I’ve included the 30-year Treasury yield on these mortgage charts to help you see how overall market rates truly impact what we pay in interest as well. The 30-year treasury rate is 99.5% correlated with mortgage rates – meaning, as Treasury rates go, mortgage rates do too, almost always. And historically, the spread, or the difference in rate between 30-year treasuries and mortgage rates, has been fairly consistent as well. But note in the second chart, how much the spread has narrowed since the start of the year.
Since the late 1970s, the average spread has been 1.4%… it’s currently only 0.80%. Why? Because the Fed has stepped in a major buyer of Mortgage-Backed Securities (MBS), holding mortgage rates lower than they might otherwise be.
Lower rates should be a good thing for buyers… but it has an unintended consequence too. The Fed can use open market activities, acting as a large buyer in the market, to lower interest rates, but it can’t force banks to lend at those lower market rates. So while lower rates are making more expensive homes more affordable to buyers, and increasing demand for mortgages, it’s also causing banks to tighten their lending standards. With interest rates very low, banks are less willing to lend to higher risk borrowers, so they limit their exposure by tightening lending standards, limiting mortgage availability to only the most creditworthy of borrowers…. this encourages the Fed to buy more MBS to loosen the credit market, and the cycle repeats itself.
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Producer Price Index for March
We have been tracking two consumer-based indices for inflation – the CPI and PCE Price Index closely over the last several months as concerns about higher inflation have increased. The Producer Price Index is a group of indicies that tracks the change in selling prices, at various stages of production, from, as the name implies, the producer perspective. Some of these PPIs, especially those associated with specific commodities, have data back to 1913.
The PPI for Final Demand represents the price of finished goods and services sold to consumers, as well as businesses and governments. It’s a broader price gauge of all final demand across the economy. This series only dates back to 2009… but for March, it had its biggest year over year increase since after 9/11, up +4.2% since March 2020.
Much of the increase in prices in the current month is attributable to rising energy prices. Bottom line – all inflation indicators continue to point to rising prices. The CPI for March will be out Monday, 4/12.
The Virus Update
Concerns over a potential 4th wave here in the US continues as new cases have now ticked up +26% nationwide from their mid-March lows. New cases are also now being seen in younger age groups, as most older people are now vaccinated (79% of those over 65 have at least one dose, and 61% are fully vaccinated).
Experts continue to stress social distancing and masks need to continue to be used until the broader population acheives similar levels of vaccination. Currently, only 21% of the total population is vaccinated, 28% of those over 18%.
For going on 2+ months now, we had seen numbers head in the right direction. But post-St. Patrick’s Day, which also coincided with many states rolling back Executive Orders around various health restrictions, there is definitely a visible uptick in new cases. We also this week started to see an increase in deaths as well.
On the bright side, we do continue to see solid progress in the vaccine rollout. We saw a 14% increase in both vaccines distributed and administered last week relative to the week prior, and are now vaccinating nearly 3 million people daily. Note that vaccination data continues to be updated for up to a week, so expect the most recent week’s data to increase. So far, over 70 million people are now fully vaccinated, representing 21% of the population. Many experts believe we need to get to 65-80% vaccinated to achieve herd immunity, which would allow life to resume with some level of normalcy.
The Week Ahead
After a relatively quiet few weeks following the end of March, it’s a big week for economic data as well as the beginning of earnings season. Just over 100 companies are scheduled to preport Q1 2021 earnings this week (4/12-4/16) including most major banks, with more than 300 companies scheduled for next week (4/19-4/23).
Major earnings releases to watch this week?
- Wednesday, 4/14 – JP Morgan (JPM), Wells Fargo (WFC), Bed Bath & Beyond (BBBY)
- Thursday, 4/15 – Bank of America (BAC), PepsiCo (PEP), Delta Airlines (DAL)
On the economic front, we also have lots of data coming this week:
- Tuesday: Consumer Price Index for March
- Thursday: Advanced Retail Sales for March, Weekly Jobless Claims, Mortgage Rates & Fed Balance Sheet data
For More Information…
For a more detailed history of all the metrics shared, check out When Will the Economy Recover, which I previously updated monthly through 2020, and gives a more detailed overview of market and economic indicators, as well as their historical context.
Questions? Feel free to leave them in the comments below, in the weekly question box in my Instagram stories, or now you can leave me voice messages for the Finance Explained podcast too!