- US stock markets have pulled back from opening levels, with the S&P 500 now trading flat around the 3910 mark.
- Equity investors continue to fret over the potential stock market impact of the ongoing taper tantrum in bond markets.
US stock markets have pulled back from opening levels, with the S&P 500 now trading flat around the 3910 mark, having been as high as the 3930s in pre-market trade (e mini S&P futures). The economic backdrop remains bullish; US data this week has been strong enough to boost optimism that the US economy continues to recover nicely in Q1 2021, but not so strong as to seriously undermine the case for further fiscal stimulus.
Blowout Retail Sales data for January, released on Wednesday have Bank of America and Goldman Sachs tracking the annualised US GDP growth rate at 5.5% and 6.0% respectively, but persistently high weekly jobless claims numbers continue to give the impression that this is a K shaped recovery and further fiscal and ongoing monetary stimulus is still very much needed. Meanwhile, the US vaccine rollout is going well and Covid-19 infection, hospitalisation and death rates continue to drop. As a result, states are increasingly easing economic restrictions.
All the above are reasons for optimism and are keeping the S&P 500 supported above the 3900 mark. But equity investors continue to fret over the potential stock market implications of the “taper tantrum” currently being observed in US (and global) bond markets. US 10-year yields are up another more than 5bps on Friday to above 1.34%, up more than 14bps on the week. The spike is even more acute in real yields; the 10-year TIPS yield is now around -0.78%, up from below -1.0% at the end of last week.
The Fed currently has a blasé to the moves; important FOMC member John Williams, who is chairman of the NY Fed, said the move higher does not present a concern. This might be taken as a green light for further appreciation. The question for equity investors is when higher yields might start to attract capital flows out of equity markets, something which could weigh heavily (as has been the case in the past.
In terms of what has been driving the move; the answer seems to be that markets are becoming concerned that the US (and perhaps other economies) might “over-heat” later on in the year/in 2022 as a result of 1) the unprecedented amount of fiscal and monetary stimulus unleashed in 2020 to combat Covid-19 pandemic induced economic weakness and 2) vaccines bringing the pandemic under control and unleashing more than a year’s worth of pent-up demand. Investors will point to recent data out of the US (PPI and Import and Export prices were sharply up) as well as global Markit PMI surveys released on Friday, which have shown that global supply disruptions are pushing up prices.
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