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Stocks will be exposed to the alternating currents of higher interest rates and fiscal stimulus for the week ahead

stocks-will-be-exposed-to-the-alternating-currents-of-higher-interest-rates-and-fiscal-stimulus-for-the-week-ahead

Traders on the floor of the New York Stock Exchange

Source: The New York Stock Exchange

The Covid-19 aid package is on its way to final approval by Congress next week – and it could be a double-edged sword for the markets.

The legislature should be greeted with optimism about the strong boost it could give the stock market and the economy, but it could also raise concerns about what a historically large stimulus package could do to inflation and interest rates.

Stocks have been mixed for the past week, with the Dow and S&P 500 higher, but the Nasdaq has been dragged down by rate-sensitive tech names. The benchmark 10-year government bond yield continued to rise, hitting its recent high of 1.61% on Friday before trading at 1.54% in late trade. The returns move against the price.

A wild card for stocks could be how interest rates behave at upcoming treasury auctions.

There will be a 10-year auction worth $ 38 billion on Wednesday and a 30-year auction worth $ 24 billion on Thursday.

Traders are watching this closely after a historically weak 7-year treasury bond auction in February raised rates even for the 10-year.

“We’re a little more cautious considering what we’ve seen in the seven years and under Japanese selling pressure,” said Ben Jeffery, strategist on the US interest rate strategy team at BMO Capital Markets.

He said Japanese institutions may be less interested in participating before their fiscal year ends on March 31.

The stimulus comes

The Senate approved a $ 1.9 trillion stimulus package on Saturday, and it is expected to go to the vote on Tuesday. Otherwise, the market is watching key inflation reports with the consumer price index expected on Wednesday and the producer price index planned for Friday.

“I think markets will be closely monitoring progress on the stimulus package,” said Michael Arone, chief investment strategist at State Street Global Advisors. “I think they will continue to monitor the Treasury Department’s 10 year move and we will get CPI data. That will inform about these steps.”

He believes that the incentive will remain a factor that could affect the markets.

Inflation has been a concern for the markets as rising inflation could depress margins and hurt profitability. For bond investors, this would undermine value and make interest payments less worthwhile.

“As long as the rise in government bond yields matches the rise in inflation, I think the market will be able to handle it. I think the challenge is that the yields are well above inflation … I want them to be tight go together. “said Arone.

He said the market was concerned that the next stimulus package could overheat the economy and generate inflation, especially following the package approved in December.

“I think it adds something to the conversation, ‘Do you really need another $ 1.9 trillion?’ Arone said, “We’re going to put more gas on the fire, and that $ 1.9 trillion is what the market is worried about.”

Consumer inflation should remain somewhat subdued in February after core CPI rose 1.4% yoy in January. However, the rate of inflation is likely to accelerate in March and April in particular, as comparisons with last year when the economy closed are likely to look extreme.

Chopped off to continue

Strategists expect the push-pull between rates and stocks to continue.

On Friday, rates were higher and inventories were also higher following a strong February jobs report. The economy created 379,000 jobs in February, around 160,000 more than expected.

“I don’t think 1.5%, 1.6% in 10 years is terribly problematic for the market,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. She said the speed of movement was unsettling.

The rotation from technology and growth to more cyclical names in finance, energy and industrial continued last week.

With oil prices at a nearly two-year high, energy consumption rose by more than 10%. Financials saw the next strongest move, up 4.3% over the week.

“I think we are in a troubled consolidation phase,” said Sonders.

“You are seeing some extreme historical spreads between what energy and finance are doing lately and what technology and consumer discretionary are doing,” she said.

Sonders added that even if the consolidation period is nearing its end, it suggests that some frothy names may have more downsides. “The good news here is that I think it will be a better environment for active stick pickers,” she said.

The Nasdaq Composite fell more than 10% on Thursday from its February 12 high. But on Friday the index turned around and gained 1.6%. This is a positive sign for the market, especially since it happened when interest rates were rising.

The S&P 500 gained 0.8% and the Dow 1.8% over the course of the week. Meanwhile, the Nasdaq was down 2%.

“Ultimately, I think the higher quality segments that were affected in technology and communications probably needed to be reevaluated,” said Sonders. “We seem to have had some microbubbles in the market and they may have to suffer more disadvantages.”

She said investors may want to adjust the allocation of their holdings regularly instead of waiting for adjustments on the calendar

“If you’re seeing a two, three week, four, five day increase in any given sector, cut back a bit,” Sonders said, not something that is the opposite of what most people do.

Calendar for the week ahead

Monday

Merits: Stitch Fix, Casey’s general store

10: on wholesale stocks

Tuesday

Merits: H&R Block, Navistar, Thor Industries and Dick’s Sporting Goods

6:00 am NFIB Small Business Survey

1:00 p.m. Auction for 3-year banknotes valued at $ 58 billion

Wednesday

Merits: Campbell Soup, Oracle, Vera Bradley, Tupperware, United Natural Foods, Adidas, Cloudera, Hummel, Fossil, Lending Club, Express, AMC Entertainment

7:00 am mortgage applications

8:30 a.m. CPI

1:00 p.m. $ 38 billion 10-year banknote auction

2 p.m. federal budget

Thursday

Merits: Ulta Beauty, Vail Resorts, DocuSign, Poshmark, Gogo, Zumiez, JD.com, WPP, Party City

8:30 a.m. unemployment claims

10:00 JOLTs

1:00 p.m. 30-year bond auction valued at $ 24 billion

Friday

Merits: Buckle

8:30 a.m. PPI

10:00 am Quarterly Service Survey

10:00 am consumer mood

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Katherine Clark