March 2021 Monthly Review
March put an exclamation point on the major macro trends we have seen in the markets over the last several months. Most notably has been the sharp rise in interest rates, and the continued steepening of the yield curve. Rising vaccination rates, enormous stimulus, and infrastructure packages, and strong economic data (GDP estimates as high as 7% for 2021) have all been supportive driving increased risk and climbing interest rates. Equities continue to defy gravity as multiple catalysts give investors good reason to increase risk.
Economic news in the US has been quite robust. February nonfarm payroll gains almost doubled economist expectations. Consumer confidence remained strong despite some fall off in retail sales (from high levels) and a respite for home sales (possibly a result of higher interest rates and low inventory). Manufacturing has been solid in recent data, and the service sector remains healthy. Reports of “back to normal” demand are being highlighted from industries that were hit hard during the pandemic.
Inflation fears remain prevalent and have caused part of the shift in yields. Unit labor costs and prices paid indices came in strong, while core PCE, CPI, and PPI remained in check. The Federal Reserve Board continues to “downplay” a long-term spike in inflation and explain recent increases as transitory. Early in March, Treasury Secretary Janet Yellen publicly agreed with the FOMC inflation assessment. The Fed continues to provide markets with stimulus and keep short-term interest rates anchored close to zero. The move in fixed income markets post March 17th Fed meeting seemed to align with the most hawkish of estimates, with no rate movements until 2023.
Fiscal policy from the Biden administration took form with stimulus in the first quarter and capped off in late-March with a 2 trillion dollar “American Jobs Plan” that focuses on rebuilding the nation’s infrastructure. So far, stimulus approvals and plans have been favorable for risk markets, but alert warnings are growing as corporate tax rates and capital gains taxes are highlighted to pay for the current stimulus plan. Rigorous debate in Congress has already begun.
While the current administration, the Fed, and the vaccine-induced economic boom have played major roles in the current macro market backdrop, technical factors have been driving interest rates and fixed income markets. US Treasury auction demand has deteriorated even though rates have been higher than throughout most of 2020. Investors are closely watching “indirect” bidders as a gauge of interest from other global central banks. Many feel bonds once again offer value, as global yields remain stubbornly negative in many industrialized nations. The steepening of our yield curve could now make sense to countries like Japan (buying US dollar and bonds versus Yen holdings). Still, some question whether political discord could finally persuade them to lower their US debt amounts (China?).
Technical factors have pushed money market rates to unusually low levels, even by current standards. The Treasury has flooded the market with unused capital which has driven repo rates to zero (in some cases negative). This has filtered into Treasury bills, collapsing yields to 0.01% for much of the maturity periods. As quarter-end disappears, and tax bills get paid (despite the extra tax time) money may filter back into longer maturities and credit markets.
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