Market Update March 10, 2021

Wall Street closed mostly in the green on Wednesday and the Dow Jones notched a new record, as fiscal aid advanced as expected and yields declined. On the policy side, House Democrats passed the $1.9 trillion stimulus bill that includes extensions for jobless benefits and stimulus checks so President Joe Biden can sign it by Friday. On the macro side, the 10-year Treasury yield was down 2 basis points to 1.52%. Meanwhile, consumer prices jumped 0.4% on a monthly basis, with the Consumer Price Index up 1.7% on an annual basis. On the corporate side, shares of Tesla fell 1% after soaring 20% in the previous session. The Dow Jones gained 463 points or 1.5% to 32,296. The S&P 500 jumped 23 points or 0.6% to 3899. In contrast, the Nasdaq lost 5 points or less than 0.1% to 13,069.

The yield on the benchmark US 10-year Treasury note rose slightly to 1.52% on Wednesday afternoon, from a session low of 1.514%, after Treasury auctioned $38 billion in 10-year notes at 1.523%. Bond yields have been hovering around their highest levels in over a year, amid prospects of a swift economic recovery, helped by the coronavirus vaccine rollout and further fiscal support. At the same time, growing inflationary pressures could force the Federal Reserve to consider tightening monetary policy sooner than expected. Data released earlier showed inflation rate hit a 12-month high of 1.7% as widely expected, while the core inflation came in weaker than expected and hit its lowest level in eight months. 

Annual inflation rate in the US increased to 1.7% in February of 2021 from 1.4% in January, compared to market forecasts of 1.7%. It is the highest rate since February of 2020 with main upward pressure coming from energy cost (3.7% vs -3.6% in January), namely gasoline (1.6% vs -8.6%), electricity (2.3% vs 1.5%) and utility gas service (6.7% vs 4.3%). Prices of medical care services also increased slightly more (3% vs 2.9%). In contrast, prices slowed for food (3.6% vs 3.8%), used cars and trucks (9.3% vs 10%), shelter (1.5% vs 1.6%) and new vehicles (1.2% vs 1.4%) and cost of apparel fell more (-3.6% vs -2.5%). On a monthly basis, consumer prices were up 0.4%, also in line with expectations as gasoline went up 6.4% and accounted for over half of the increase. Annual core inflation on the other hand, came in below forecasts at 1.3%. Fed Chair Powell has been reiterating the inflation could temporarily exceed 2% although upward price pressures are likely to be temporary.

The dollar index edged down to below 92 on Wednesday, after fresh data showed the inflation rate in the US rose 0.4% from the previous month as expected easing concerns that it would pick up too fast. The annual inflation rate increased to 1.7% in February, in line with forecasts and core inflation came slightly below expectations at 1.3%. Meantime, Treasury yields retreated and investors await the House to pass the $1.9 trillion stimulus bill during the day. The greenback has gained more than 2% so far this year as upbeat economic data and massive stimulus bill prompted fears of rising inflation and led to a bond-selloff.

The US posted a budget deficit of USD 311 billion in February 2021, compared with a USD 235 billion gap in the same period last year and surpassing market expectations of USD 265 billion. Outlays jumped to USD 559 billion, while receipts declined to USD 248 billion. The spending figure included the USD 900 billion relief package Congress, but not the USD 1.9 trillion bill currently still discussed. Spending for income security was recorded at USD 122 billion, followed by outlays in social security (USD 94 billion), commerce & housing credit (USD 93 billion), medicare (USD 59 billion), health (USD 58 billion), and national defense (USD 54 billion). For the first five months of the 2021 fiscal year started October 1st, the US federal deficit was a record-breaking USD 1047 billion, as spending to deal with the COVID-19 pandemic surged while revenue declined. 

Mortgage applications in the United States fell 1.3 percent in the week ended March 5th, after a 0.5 percent increase in the previous week, data from the Mortgage Bankers Association showed. Applications to refinance a home loan declined 5 percent on a weekly basis and were 43 percent lower than a year ago, the first yearly drop since March 8, 2019. Applications to purchase a home, which are less sensitive to weekly rate moves, rose 7.2 percent from the previous week and were up 2 percent year-on-year. The average fixed 30-year mortgage rate was up 3 basis point to 3.26 percent, the highest level since the week ended July 3rd.

European stock markets closed mostly higher on Wednesday, with Frankfurt’s DAX up for the third session to a new all-time high, on optimism over strong growth momentum this year and as the bond market selloff eased. Meantime, traders await the passage of the $1.9 trillion stimulus bill in the US later in the day and the ECB monetary policy decision tomorrow. On the corporate front, Adidas said it expects a strong rebound in sales this year and Inditex also sees higher online sales for 2021.

The FTSE 100 closed marginally lower at 6,723 on Wednesday, after two consecutive sessions of gains, dragged down by mining shares like Rio Tinto and BHP Group amid falling iron-ore prices. Meantime, traders continue to follow prospects of a global economic recovery, the passage of the $1.9 trillion stimulus bill in the US and high bond yields. On the corporate front, Restaurant Group said it was planning to raise £175 million through a share sale after the Frankie & Benny's owner posted a bigger loss due to a hit to its business from Britain's latest round of lockdowns. Insurer Legal & General posted a 3% dip in 2020 operating profit, hit by a slowdown in housebuilding and demand for life insurance products due to the pandemic.

The CAC 40 jumped more than 1% to 5,991 on Wednesday, its highest level since February 2020, on hopes of a strong economic rebound from the coronavirus crisis. On the economic data front, France's industrial output rose by 3.3%, easily beating market expectations of a 0.5% increase. Elsewhere, investors await the final passage of a $1.9 trillion stimulus bill in the US and the ECB monetary policy meeting due tomorrow, in which policymakers will debate the merits of intervening to bring yields down.

The Nikkei 225 closed flat at 29036.56 on Wednesday following gains of 0.99% in the previous session as gains in technology stocks tracking an overnight Wall Street rally offset a fiscal year-end sell off by domestic funds. Meantime, Long term bond yields eased slightly but remain at elevated levels, with local 10-year rates at 0.126% while US 10-year bond yields held at 1.54%. Traders continued to follow reports that Prime Minister Yoshihide Suga will join an online meeting with leaders from the US, Australia, and India on Friday to discuss issues such as steps to contain coronavirus infections and climate changes. Locally, Japan's National Institute of Infectious Diseases said Tuesday that nearly 400 people in Japan have been infected with a new variant of the novel coronavirus different from those found in Britain, South Africa and Brazil.

The Shanghai Composite fell 1.55 points or 0.05% to 3357.74 on Wednesday, trading at 3-month as concerns over overvaluation and vulnerability to rising interest rates continue to weigh on the market. Official data showed consumer prices in China fell less than expected in February while factory gate prices rose the most since November 2018 over the same period. Meanwhile, US 10-year rates eased slightly but remained near 13-month highs to 1.535%, while local 10-year yields lifted to 3.243%. In Hong Kong, the Hang Seng Index added 76.5 points or 0.27% to 28849.73.  

Brent crude futures fell slightly to trade at around $67.3 a barrel after attempting gains early in the session on Wednesday, after latest data showed a bigger-than-expected build in US crude stocks. Still, oil prices are up about 30% this year after recovering to pre-pandemic levels in February, due to supply cuts from Saudi Arabia and OPEC while the demand outlook improves with the rollout of Covid-19 vaccines. In addition, Middle East tensions escalated after reports of attacks on oil facilities in eastern Saudi Arabia. On the other hand, concerns grow that US drillers could increase activity due to higher prices.

NYMEX natural gas futures fell to below $2.7 per million British thermal units, its lowest level since January 29th and down more than 15% from the February high, as liquified natural gas levels recover from declines forced by the deep freeze in Texas that shut down wells and processing plants. Prospects of lower demand due to warmer weather outlook also weighed.

Gold rose to its highest in more than a week on Wednesday, consolidating the rebound from a nine-month low of $1,676 touched earlier this week, as a weaker dollar and lower US Treasury yields drove buying into the bullion. Recent data showed US inflation rate rose 0.4% from the previous month, easing concerns that it would pick up too fast. On top of that, the imminent passage of Joe Biden’s $1.9tn coronavirus relief package lent further optimism to the gold bulls. 

Silver bounced back to $26.0 an ounce on Wednesday, on easing bond yields and weaker than expected inflation numbers from the US. At the same time, investors hope for a strong economic recovery as the $1.9 trillion US COVID-19 relief bill is expected to be considered and passed later today, while COVID-19 vaccine rollouts gain steam around the globe.

The Baltic Exchange's main sea freight index extended gains for a seventh straight session and rose 4.2% to 1,980 on Wednesday, its highest since October 7th, 2020. The capesize index, which tracks iron ore and coal cargos climbed 10.6% to 2,157, its highest level since January 26th; and the supramax index advanced 48 points to touch a new record high of 2,017. Meanwhile, the panamax index, which measures coal or grain cargos went down 0.9% to 2,218.   

Chicago lumber futures have been trading around $990 per thousand board feet as investors unwound long positions following a massive rally that drove prices to a record level of $1,021.8 per thousand board feet on February 22nd. Still, Lumber prices doubled in value since last November, a surprise during the traditional weaker winter months in a positive sign of a building boom during the economic recovery from the Covid-19 hit. The stay-at-home lifestyle has encouraged homeowners to expand or remodel their existing dwellings. Record-low borrowing rates and an exodus from major cities exacerbated this home-building spree. On the supply front, mills were not able to ramp up fast enough to keep available supplies from drawing down. Given the above and the fact that the US economic recovery is gathering pace, this technical selling should be short-lived.

Thank you and please stay tuned for more upcoming reports.

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Len Martinez is a Financial Consultant. Information in the "Bull Valley Advisor” newsletter should not be considered as investment advice or an offer to buy or sell securities. Data is derived from sources considered to be reliable including Morningstar, StockCharts.com, YAHOO Finance, FINVIZ, TipRanks, Investing.com, ECRI, OECD, gurufocus, Crestmont Research, Trading Economics and S2O. Results are not guaranteed. Len Martinez is not an RIA. The data is shown for informational purposes and should not be considered investment advice or an offer to buy or sell securities.