The markets will reopen following Monday’s MLK Jr. Day holiday. U.S. equity futures edged higher in quiet Monday trading, alongside gains in most European bourses, led by the DAX’s 0.44% rally on expectations of positive corporate earnings results and decent guidance with announcements to being in earnest this week. The FTSE bucked the bullish trend and closed with a -0.22% decline on a stronger pound, along with ongoing Covid and Brexit woes. Asian markets were mixed with Chinese shares climbing 0.84% to 1.1%, supported by a stronger than expected GDP number, while the rest of the region was in the red. EGB were mostly weaker, rising just over 1 bps, while the JGBs cheapened 1.5 bps too.
We believe investors should pay special attention to the 10-year yields. The yield is currently rising on inflation fears which is the opposite of what the Fed has been saying. The chart above is the 10-year yield versus the S&P 500. Our opinion is that bond traders are pricing in a jump in inflation which will occur as a result of increased government spending. Biden has picked Janet Yellen as his chief economical advisor who has a leaning toward a “balanced budget” for the government approach in her writings but is very open to increased spending short term. What this potentially means to investors is that we could the Fed try to keep rates low, while the market increases rates. Interest-sensitive sectors like utilities (which often carry a lot of debt), bonds, and bond funds are at risk of getting hard if the market turns against them. The good news is we think it is unlikely to happen until 2022 if not 2024.
Attention this week will be on Wednesday’s inauguration of Joe Biden. He announced a $1.9 tln stimulus package last week, though it’s questionable whether it will pass Congress intact. Meanwhile, he’s expected to quickly issue a number of Executive Orders, including rejoining the Paris Accord. Earnings will highlight the calendar amid a thin offering of data. Slated are Bank of America, Netflix, Goldman Sachs, UBS, State Street, Haliburton, and J.B. Hunt are due Tuesday. The economic docket includes just the November TIC report on international capital flows. Over the rest of the week, there are housing starts, the Philly Fed index, jobless claims, and existing home sales.
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