Finance News this Week 4-5-2021

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It was a short week for the markets, with the stock market closed for Good Friday and the bond market closing early Friday at noon… but that didn’t stop there from being plenty of activity and finance news this week. The biggest news? President Biden unveiled the first part of his Build Back Better campaign promise – the American Jobs Plan, a $2.3 trillion infrastructure plan to be funded with debt and raising corporate taxes. Read on to learn how this impacted both the stock and bond market last week. Also, last week we got the Employment Report for March for the latest insights on the labor market recovery. For more finance news, you can find all the previous Monday Market Update’s here. You can now also get the weekly headline highlights on Finance Explained, my new podcast.

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Monday’s Finance News for this 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

When inflation concerns overtake recovery expectations, bond yields rise and the market performance is tepid. This has been particularly true given recovery projections are largely still just that – projections – and we are still waiting to see it show up in most of the reported economic data… but this week’s announcement by President Biden of a $2.3 trillion infrastructure spending bill added some major fuel to the fire on both counts. A massive increase in government spending will fuel demand and help the labor market, but it’s also fueling greater inflation expectations and higher interest rates, as the government will need to issue more debt to fund it, while also raising corporate tax rates, which could slow the private sector recovery.

The S&P 500 closed at a new all-time high Thursday, despite higher jobless claims and rising mid-term rates for the week. It finished up +1.1% for the week, with all of the gain coming from Thursday’s performance. The S&P 500 is now up +7.0% year-to-date, with much of the performance driven by early cyclicals, including Energy stocks, Financials (which drive profits in a rising rate environment), and Industrials. Last week, we saw mid-term rates hit their highest levels in a year following the announcement of the American Jobs Act, while 30-year rates held steady. The 10-year and 30-year treasury bond yields are now up more than 0.80% and 0.70%, respectively since the start of the year, an 89% and 44% increase in yield in just 3 months.

How does this impact you? It increases the interest rates you pay. Last week, we saw 30-year mortgage rates increase for the 7th consecutive week and now at 3.18%, still near historic lows, but nearly back to pre-pandemic levels. More on mortgage rates below.

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 widened again this week, ending the week at 2.34%, it’s highest level in 2021 yet. 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

Last week, Commodities rallied around the announcement of a potential $2.3 trillion in government spending to support infrastructure, taking many stocks that stand to benefit with them.

We continue to see recovery hopes and inflation concerns drive outperformance of cyclical, small cap and value stocks over growth and tech stocks, which have underperformed year-to-date. Growth and tech stocks did rally last week, however, up +2.3% and +2.7% for the week, respectively, while small cap stocks also rallied again last week, up 1.0% for the week.

In the bond market, you can see a similar outperformance of higher risk securities, as investors seek 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. For more on the inverse relationship between bond yields and bond prices, see 10+ Different Types of Investments under How Bonds Work.

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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. Longer-term interest rates have risen, spurred by the hopes of the economic recovery, as well as inflation concerns and the significant coming issuance of Treasury bonds, necessary to fund the $1.9 trillion stimulus package and now the proposed American Jobs Plan too. Long-term rates held relatively steady last week, but mid-term rates continued to increase, with 2-5 year maturity bonds seeing the largest increases in yield. 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 rallied again last week – surpassing the $60,000 mark in intraday trading on Friday, it’s highest level yet.

The Economic Weekly Market News

This week’s major economic releases included:

• Wednesday: Fed Releases Factors Affecting Reserve Balances (will discuss these along side mortgage rates below)
• Thursday: Weekly Jobless Claims & Mortgage Rates
• Friday: March Employment Situation

March Employment Situation

The first Friday of the month is always Jobs Friday – when the Bureau of Labor Statistics releases it detailed Employment Situation report for the month prior. The March report is the strongest we’ve seen since August. Total nonfarm payroll employment rose by 916,000 in March (vs. just 379,000 in February), and the unemployment rate dropped by 0.2% to 6.0%.

But these headlines don’t tell the full story. Tthere were job gains across all industires, but some sectors are worse off today than at the peak of the pandemic – like Mining, Oil & Gas. We also still remain 8.4 million nonfarm payroll jobs short of where we were last year, pre-pandemic.

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The headline unemployment rate also understates the real impact of this downturn, as it doesn’t account for the 3.9 million fewer people in the labor force today vs. pre-pandemic (February 2020). The labor force represents people employed and actively looking for work. Today, there are 3.9 million fewer people in the labor force than there were a year ago. The U-6 rate, which includes those who are both underemployed, as well as those who have stopped looking for work in the last year, remained at double-digits, 10.7% for March, still 1.8x the headline rate.

Also while we saw the headline unemployment rate improve for all in March, it still remains much higher for Black (9.6%) and Hispanic Americans (7.9%), as well as for those without a high school diploma (8.2%).

These disparities are now part of the “maximum employment” goal the Fed looks at when setting monetary policy. We saw Fed Chair Jerome Powell speak to Congress two weeks ago and at a Wall Street Journal jobs summit last week where he very clearly reiterated the Fed’s commitment to accommodative monetary policy until the labor market achieves a broad and inclusive level of maximum employment – which given the March data, we continue to fall short of. On the flip side, the Fed’s accommodative monetary policy is part of what continues to fuel inflation concerns.

For some perspective – we lost more than 22 million jobs in 2 months at the start of the pandemic. It took more than 2 years to lose 8.7 million jobs during the Great Recession, and it took over 4 years to recover them all. We have already recovered 14.0 million jobs since April, which is incredible… but we still are short nearly as many jobs as at the worst point of the Great Recession a decade ago.

Women’s Employment

At the outset of the pandemic, women’s employment was disproportionately impacted by the shutdown. Female domainted industries were disproportionately impacted, and many mothers, faced with school closures and no child care, chose to step away from work to care for their children.

Since the start of 2021, women have seen disproporationate gains in employment, accounting for more than 80% of all jobs added, while for the last 2 months, men have actually seen job losses. Women have now lost fewer jobs than men.

Job Quality

The Employment Situation report includes data from employer payrolls, like average weekly hours and average hourly earnings. If we look at this data for nonsupervisory employees, we actually saw both hours and hourly earnings increase at the start of the pandemic, as employment fell. Why? Many of the most impacted sectors are lower wage, with higher part-time employment. This left higher paid, higher skilled workers on payrolls. It also may have demanded more hours from those who remained on the job.

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Some get concerned as we add jobs back, that they may be just part-time or have less compensation… but even with nearly 1 million jobs added in March, the data doesn’t show that. We actually saw hours increase, and wages tick up slightly.

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 3/27 increased to 719,000 from the previous week’s revised level of 658,000. Most economists expected them to continue to improve, so this was disappointing.

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Total insured unemployment, under regular state programs, is down to 3.8 million people, an insured unemployment rate of 2.7%. 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 3/13 (this comes at a longer lag) is far greater – 18.2 million, this week down by 1.5 million claims vs. the week prior (which was revised up by 0.8 million, all under expanded Federal programs). This total has 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 two weeks ago, the expanded Federal benefits programs are now extended to the end of August, so we will see if that ends some of the volatility around those in the coming weeks, as it often takes some time for these changes to filter through to implementation by each state.

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 demand. 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 3/25/2021, the average 30-year rate was 3.18% with 0.7 points, now up +0.51% since the start of the year, and almost back to pre-pandemic levels.

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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.

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Lower rates should be a good thing for buyers… but it has an unintended consequence too. The Fed can use open market activities to lower interest rates, but it can’t force banks to lend at those lower 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 take on risk, so they limit their exposure by tightening lending standards, reducing 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.

We can see this in the credit scores of loan originations. Credit scores range from 300 to 850, with the national average in the US being 711, based on the latest report from Experian. But in Q4 2020, 85% of mortgages were issued to those with a credit score of 720 or higher. This was the case for all of 2020 vs. more like 70% of mortgages over the last 20 years.

The Political Weekly Market News

The biggest political news of the last week most likely to impact your family finances was President Biden’s unveiling of his American Jobs Plan proposal. The White House released a Fact Sheet on Wednesday ahead of the President’s speech from Pittsburgh later that day.

The plan proposes $2.3 trillion in expenditures across a range of infrastructure, manufacturing, jobs and green energy initiatives, to be funded through raising corporate taxes. The spending is to occur over the next 8 years, but would initially require deficit spending to fund it, as the tax increases will take 15 years to recoup the cost. Below is a visual breakdown of the plan, though remember that this is just a proposal. It will now be up to Congress to formulate a bill and pass it for it to become a reality, and negotiations are likely to make changes from this starting point.

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Republicans are against the tax hikes, moderate Democrats are concerned about the size of the plan and deficit spending, and progressive Democrats don’t think it is big enough. Funding infrastructure has always brought with it a debate over who and how it should be paid for… infrastructure investment can drive future growth, and the US has under-invested in the recent past, so many are in favor of investing in infrastructure.

However, raising corporate taxes in the early days of an economic recovery could slow the labor market recovery and is also known to reduce private investment, which reduces private growth going forward. Most studies point to private investment as being more productive than government investment, so the net result of the current plan as proposed could be lower growth in the future. A CBO report from 2016 on The Macroeconomic and Budgetary Effects of Federal Investment explores this dynamic.

The Virus Update

Some concern in this week’s virus update, as new cases have now ticked up +20.0% nationwide over the last 2 weeks. New cases are also now being seen in younger age groups, as most older people are now vaccinated (75% of those over 65 have at least one dose, and nearly 55% 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 18.5% of the total population is vaccinated, 23% 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 still see continued declines in daily deaths. Declines to date are attributed to a combination of subsiding from the post-holiday spike, as well as the continued aggressive rollout of the vaccine, which began in mid-December.

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We also continue to see solid progress in the vaccine rollout. We saw a 15% increase in both vaccines distributed and administered last week relative to the week prior, and are now vaccinating more than 2.5 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 60 million people are now fully vaccinated, representing 18% 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

It’s a relatively quiet week for economic data. Economic releases expected this week include:

• Thursday: Weekly Jobless Claims & Mortgage Rates
• Friday: Producer Price Index – measures inflation from producer side of equation

For More Information…

For a more detailed history of all the metics shared, check out When Will the Economy Recover – updated monthly, which 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!

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