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For a change, the S&P 500 did not have the best week. As of writing, it was down 2.4% compared to last week’s close. Blame the Treasury yield. The 10-year Treasury yield hit the highest point in a year amid a more upbeat global economic outlook and rising concerns over inflation. The decline in equities was primarily led by large cap technology stocks, which have so far made major gains during the crisis. Still, the S&P 500 is 3% higher than where it was at the start of this year.
On the monetary policy front, the Federal Reserve’s Chairman Powell probably had the most optimistic assessment of the economy since the start of the pandemic. He told Congress that there was “hope for a return to more normal conditions”. Still, Powell signaled he is in no rush to tighten monetary policy or drawdown asset purchases even with a brighter economic outlook. The Chairman also reassured markets on the inflation front. He said that inflation dynamics do “not change on a dime” and that “the economy is a long way from our employment and inflation goals”.
In terms of economic data, personal income surged by 10% month-on-month in January, in line with market expectations. The strength was primarily due to the 52.6% increase in social benefits which include stimulus checks and expanded unemployment insurance benefits. Meanwhile, personal spending rose by 2.4% and was led primarily by goods which went up 5.8% (Chart 1). The rise in goods spending was seen across the board, with recreational goods and vehicles driving most of the gains. The services sector also showed resilience, eking out a 0.7% growth in spending. Gains were mostly led by food services and accommodation, the industry which has been in the line of fire right from the outset of this pandemic.
Turning to the labor market, jobless claims fell far more than expected (Chart 2). Initial claims came in at 730k, down 111k from the prior week, and beating the consensus of 825k. This was the largest weekly drop since the end of August. But not all states performed the same. California and Ohio registered the biggest declines while Illinois and Missouri recorded notable growth. Continuing claims came in at 4.4 million, 41k less than the consensus and down 0.1 million from the week before. Still, both claims are almost three times higher than their pre-pandemic levels. The labor market remains the weak link in an otherwise stronger-than-expected start to the new year for the economy.
Meanwhile, revisions to the second GDP release were relatively minor. The economy grew 4.1% annualized in the final quarter of last year, slightly higher than the initial estimate of 4.0%. Government and household spending were both revised down 0.1 ppts. Meanwhile, non-residential fixed investment was adjusted up 0.2 ppts, driven by stronger spending on equipment and intellectual property products. Residential investment was also revised higher by 0.1 ppts. Given the relatively minor adjustments to the quarterly data, there were no changes to the annual GDP, which shrank 3.5%.
Sohaib Shahid, Senior Economist | 416-982-2556
Release Date: Mar 1, 3
Previous: manufacturing 58.7; services 58.7
TD Forecast: manufacturing 59.5; services 58.7
Consensus: manufacturing 58.6; services 58.7
Business surveys already reported for February have generally been as strong, or stronger, than the surveys for January, consistent with high readings again for the ISM indexes; we forecast a rise in the manufacturing index and no change in the services index. Survey readings are likely being boosted by optimism about COVID and fiscal stimulus.
Release Date: Mar 5
Previous: NFP 49k; UE rate 6.3%; AHE 0.2% m/m, 5.4% y/y
TD Forecast: NFP 300k; UE rate 6.3%; AHE 0.2% m/m, 5.3% y/y
Consensus: NFP 145k, UE rate 6.4%; AHE 0.2% m/m, 5.3% y/y
*Forecast by Rates and FX Strategy Group. For further information, contact TDRatesFXCommoditiesResearch@tdsecurities.com
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