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  • US stocks surged on Monday for their best day since June as focus returned to an overwhelmingly positive macro backdrop.
  • The S&P 500 rallied back to the north of the 3900 level, up 2.4% on the day.

Wall Street saw its best day since June 2020, with the S&P 500 rallying 2.4% from below 3850 to close above the 3900 mark. The Nasdaq 100 gained 2.9% to close not far from 13,300 and the Dow gained 1.95% to regain the 31,500 handle. The small cap Russell 2000 was the best performer of the bunch, up more than 3.0% on the day, whilst the CBOE Volatility Index (VIX) dropped 4.6 points back to the 23.00s. All equity sectors performed well.

Risk-on

The stars aligned for a ferocious rally on the first trading say of the new month. Firstly, bond market turmoil, the main factor that to weigh on risk appetite in the second half of February, seems to be easing. US 10-year bond yields dropped a modest 3bps on Monday to finish the session just below 1.43% and traded within a 7bps 1.38%-1.45% range. That compares to last Thursday and Friday’s closer to 20bps trading ranges that saw yields swing as high as 1.60%.

Bond market calm has allowed investors to refocus on the macro backdrop which remains as positive as ever; 1) US President Joe Biden just scored his first key legislative win, with his $1.9T stimulus package passing the House of Representatives last Friday and Senate Democrat Majority Leader Chuck Schumer said on Monday that the Senate would vote on the bill this week, where t is expected to pass, 2) the US FDA gave J&J’s Covid-19 vaccine EUA, paving the way for further acceleration of the country vaccine rollout, 3) Covid-19 infections (7-day moving average at its lowest since November), hospitalisations (under 50K nationwide for first time since November) and deaths continue to trend lower in the US (and globally), and finally 4) there was positive data on vaccine efficacy out of the UK; Public Health England, citing a real-world study, said both the Pfizer and Oxford/AstraZeneca vaccines are highly effective in reducing Covid-19 infections among people aged 70 years and above.

Elsewhere, US data was strong; the final Markit Manufacturing PMI headline index number for February saw a slight revision higher to 58.6 from 58.5 and Construction Spending in January grew at a slightly faster MoM pace of 1.7% versus expectations for a MoM growth rate of 0.8%. Meanwhile, the main data in the spotlight on Monday was the attest ISM Manufacturing PMI report. The headline ISM Manufacturing PMI number for February came in above expectations at 60.8 (consensus was for 58.8), its highest since September 2018. The employment subindex rose to 54.4, boding well for this week’s official US labour market report. New Orders rose to 64.8 from 61.1, in a sign of strong demand ahead. But the Prices Paid subindex shot higher to 86.0, its highest level since 2008. According to Capital Economics, “higher oil prices and the depreciation of the dollar are putting some upward pressure on US prices this time around too, but the scale of the rise in the ISM prices paid index goes well beyond what can be explained by those factors alone”. The economic consultancy continues that “the comments in the report also make it crystal clear that these shortages go well beyond just semiconductors, with firms in every sector reporting shortages and problems with suppliers keeping up with demand”.

Amid further evidence of the build-up of inflationary pressures following this latest ISM report, ING comments that they now “expect inflation to rise above 3.5% in the second quarter”. Though the Fed has said that this expected increase in inflation will not be sustained and thus does not warrant a policy response, ING thinks “there is a growing risk inflation could end up being a little stickier around the 3% mark given the prospect of vibrant, stimulus fuelled demand coming up against a supply-constrained economy and businesses taking advantage to rebuild margins.” Thus, concludes the bank, though “the Federal Reserve tells us that they don’t think they will raise interest rates before 2024… we feel that this will be increasingly difficult to reconcile with the data… (and) mid-2023 looks increasingly likely to be the starting point for higher US interest rates”. Stocks seemed to take their cue from bond markets, which did not show any concerns about inflation following the ISM report.

Week Ahead

Looking ahead, equity investors will have their hands full this week with the February ISM Services PMI report and February ADP National Employment out on Wednesday, followed by Weekly Jobless Claims and a speech from Fed Chair Jerome Powell on Thursday (comments to be released to the WSJ), ahead of the official Labour Market Report for February on Friday. All the while, investors will continue to track the path of the pandemic and vaccine/vaccine rollout news as well as the passage of Biden’s $1.9T stimulus package through the Senate. If all goes well with these latter two, the stage should be set for further equity market upside, whilst strong data likely poses a greater threat than weak data, given the former might reignite “over-heating” concerns, whilst the latter might ease them.

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