Holbrook Insights

Rates increased modestly last week. The 10-year Treasury yield opened at 1.67 percent and closed at 1.71 percent. On Monday morning, the 30-year opened at 2.35 percent, down from last week’s open of 2.38 percent. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and increased to 0.18 percent on Monday. The Nasdaq Composite led the way last week. Communication services, consumer discretionary, and technology were among the top-performing sectors, as there was a slight reversing of the recovery trade that has been in place since the news of the Pfizer vaccine in November. Both Facebook and Alphabet were up more than 5 percent on the week. In consumer discretionary, Amazon was up more than 3.6 percent. The worst-performing sectors were consumer staples, health care, and energy.

Inflation fears have increased recently, and yet inflation remains muted, growing at just 1.4 percent year-over-year, according to the core personal consumption expenditures (PCE) price index. In August, the Federal Reserve agreed to let the PCE price index run hot to get average inflation closer to the targeted 2 percent level, so this data is worth watching. The S&P 500 and Dow Jones Industrial Average led the way for domestic indices last week. The Nasdaq Composite lost roughly half a percent, as investors stuck with staples- and energy-focused indices. REITs, consumer staples, and energy were among the top-performing sectors. Despite lower prices, the energy sector moved higher after the closure of the Suez Canal forced energy tankers to take the long route around Africa. The worst-performing sectors included communication services, consumer discretionary, and financials.

On Monday, the February existing home sales report was released. The pace of existing home sales fell by more than expected, declining by 6.6 percent during the month against forecasts for a more modest 3 percent drop. This result is likely due in large part to the inclement weather in February. Still, despite the drop in sales reported, existing home sales are up by 9.1 percent on a year-over-year basis. Tuesday will see the release of the February new home sales report. The pace of new home sales is expected to fall by 4.6 percent during the month, following a 4.3 percent increase in January. This segment is a smaller and often more volatile portion of the housing market compared with existing home sales. Still, if the estimate holds, new home sales would be up 23 percent year-over-year, highlighting continued high levels of home buyer demand. 

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On Tuesday, the February retail sales report is set to be released. Retail sales are expected to decline by 0.3 percent during the month. This would follow a 5.3 percent increase in January, which was driven in large part by the December stimulus checks hitting bank accounts. With that impact fading, a drop in sales in February is understandable. 

We saw mixed trading in equity markets last week. Technology was again the largest detractor, and the tech-oriented Nasdaq Composite continued its recent downturn. The Dow Jones Industrial Average posted a gain of 1.85 percent, however, with financials, energy, and industrials all among the top contributors. Energy was supported by an increase of 7.5 percent in West Texas Intermediate crude oil prices. 

Equity markets sold off globally as the rise in Treasury yields led to concerns over future financing costs. Yields have risen significantly over the past month as coronavirus cases have fallen and vaccinations have been distributed. While this has been a positive for equity markets, as bonds have sold off on the more optimistic outlook, the cost of debt and financing has risen significantly. This led investors to seek out sectors that would benefit from rising prices, as the higher cost of financing could be passed onto consumers, depending on price sensitivity.

Markets were mixed during the holiday-shortened week. The Dow Jones Industrial Average led domestic indices, as investors continued to seek new opportunities after the recent increase in rates. The financial sector was the top performer, as better-than-expected retail sales, likely stimulus, and falling coronavirus cases led some investors to wonder if the economy is closer to holding its own without significant Fed support. Other cyclical sectors benefiting from that theme included energy, industrials, and materials stocks. Technology and communication services sectors lagged, with coronavirus darlings Apple, Microsoft, Tesla, Facebook, and Amazon among the largest detractors. 

Rates picked up across the yield curve last week, especially with 10- and 20-year Treasury maturities. The primary focus remains on a potential stimulus package and near-term uncertainty with respect to market inflation expectations and future Federal Reserve (Fed) policy. The 10-year Treasury yield opened last week just below 1.17 percent, closing the week at 1.20 percent; it opened at 1.23 percent this morning. 

On Wednesday, the January Consumer Price Index report is set to be released. Headline consumer prices are expected to increase by 0.3 percent during the month, a modest decline from December’s 0.4 percent increase. Core consumer inflation, which strips out the impact of volatile food and energy prices, is expected to show 0.2 percent growth in January, up from a 0.1 percent increase in December. On a year-over-year basis, headline and core consumer prices are expected to rise by 1.5 percent. The annual consumer inflation rate has picked up since hitting a pandemic-induced low of 0.1 percent in May 2020