- Surging US bond yields pulled US equity markets back from record-high open levels on Tuesday.
- The macro backdrop remains supportive for US equities at the moment, however.
US equity markets were mixed on their first trading day of the week. The S&P 500 closed the session flat in the 3930s, having dropped intra-day record levels at 3950. The Nasdaq 100 also printed opening and intra-day record highs, but they dropped 0.3% on the session. Meanwhile, the Dow rose 0.2%.
Given the extent of the rally in US bond yields on Tuesday, equities actually seemed to hold up quite well. In terms of what went down in the bond market; the 10-year bond yield is up more up nearly 10bps on the day and at one point eclipsed the 1.30% level for the first time since 27 February 2020. Meanwhile, the 2s10s spread rose more than 10bps on Tuesday to 119bps, the widest the gap has been since the back end of 2015. The move higher in nominal bond yields was primarily driven by a move higher in real yields; the 10-year TIPS yield is up over 7bps from last Friday’s closing levels and is around -0.94%.
Tuesday’s bond market move was interesting in that though yields shot higher, inflation break-evens were broadly unchanged, implying that the reflation trade was not the key driver of Tuesday’s price action, but something else. That something else is likely to be a combination of growing expectations for a stronger economic recovery (vaccinations continue to go well in the US and markets still expect more fiscal stimulus) coupled with markets moving forward their expectations for when Fed policy normalisation may begin. For example, Goldman Sachs announced that they were now expecting the Fed’s first hike to come in H1 2024, versus previous forecasts for the first hike to come in H2 2024.
Some might have thought that a move like this in bonds, which makes them a significantly more attractive investment relative to stocks (versus their relative attractiveness to stocks last Friday anyway), might have weighed on the stock market. While it did drag the major indices back from intra-day highs, sentiment is holding up well for now. Another day like this on Wednesday could have a much greater impact on stock markets, however, but bonds maintaining quite this much momentum seems unlikely.
Stock market sectoral performance was very much influenced by bond market price action; financials faired the best with higher yields set to boost their bottom lines and real estate did the worst.
Positive stock market backdrop
In terms of the macro backdrop for US equity markets; expectations are that the Biden administration will exceed its 100M vaccines in its first 100 day target and that Congress will pass another large fiscal stimulus bill. Meanwhile, the Covid-19 infection rate in the country continues to drop and as the earnings season winds down, it is worth remembering that results were broadly significantly stronger than expected.
Elsewhere, US data was strong; the NY Empire State Manufacturing Index survey was stronger than expected, with the headline number jumping to 12.1 in February versus expectations for a much more modest rise to 6.0 from 3.5 in January. The strong survey bodes well for the Philadelphia Fed Manufacturing survey and Markit PMI report set to be released on Thursday and Friday respectively this week. With Covid-19 infection rates in the US dropping sharply and precipitating further reopening, the impact of January stimulus starting to be felt and expectations for further fiscal stimulus ahead, US economic data is set to improve over the coming months.
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