Before The Bell
It has been a busy morning for Wall Street already, with three key economic reports having been issued in the past few minutes. First, the Labor Department reported that jobless claims had come in at 730,000 for the week ended on February 20th. That was a sharp 111,000 better than the number a week earlier. However, weather may have been a factor in keeping filings down. Second, the Commerce Department issued revised figures for fourth-quarter GDP. Initially, Commerce’s initial release had indicated 4.2% growth. Now, the second, or “preliminary,” estimate for Q4 of 2020 has grown at 4.1%. Finally, Commerce reported that orders for durable goods had risen by 3.4% in January, a solid gain, and well above expectations of an increase in this volatile series of just 1.0%.
As for stocks, the early read on the futures suggests that the market, which closed strongly yesterday, will open on a weak note, with notable setbacks implied for the NASDAQ Composite, which has indicated an opening loss of more than 100 points. Hurting sentiment is a sharp rebound in yields on Treasury notes this morning, with the 10-year note's return surging to 1.46%-- a 12-month high.
Prior to today’s economic releases, the big story this week had been the general climb in Treasury note and bond yields. For example, early yesterday, yields on the 10-year Treasury security rose to 1.43%. To be sure, that was hardly s level that would compete with stocks in a major way, as the average yield on equities is about 2%. However, given that the nadir in the yield of the Treasury-10 over the past year has been 0.40%, the more than tripling in yields is a concern. Should they climb much further--as noted, they are already up this morning--perhaps to be in line with dividend returns on stocks, some competition with equities would likely develop.
What has propelled Treasury yields higher, meanwhile, is the dual fear of a heating up in the economy and a rise in inflation. Recent weeks, for example, have seen strong gains in retail sales, industrial production, new home sales, and now orders for durable goods. At the same time, the Producer Price Index rose to a 12-year high in January. Helping calm the bond market down yesterday, though, were reassuring comments from Federal Reserve Chair Jerome Powell, who spoke of a soft labor market and muted inflation, overall. He also indicated that the central bank would keep interest rates low for some time.
The Fed Chair's testimony before the Congress clearly helped stocks reverse early steep losses yesterday, enabling the Dow Jones Industrial Average to hit a record high in late trading. Things went well on the NASDAQ Composite, too, but to a lesser degree. That index had borne the brunt of the early week selling, on fears of overvaluation in the tech sector, in particular among high-profile names, such as Tesla (TSLA) and Amazon.com (AMZN).
So, as we look ahead, and with earnings season in the rearview mirror to a great extent, the focus for now appears to be on the Treasury note and bond market. That emphasis could be good news for economically sensitive stocks, which benefit from a stronger economy, but a further restraint on high-growth tech issues. So, some further sector rotation is likely at this time.
– Harvey S. Katz, CFA
At the time of this article's writing, the author did not have a position in any of the companies mentioned.
