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Wall Street Breakfast

Author: bmotrader   |   Latest post: Thu, 15 Apr 2021, 10:13 AM

 

Wall Street Breakfast: The Yield Curve

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The Fed's optimistic, but are investors? On Wednesday, the central bank sharply upgraded its 2021 GDP growth forecast to 6.5%, the largest annual output since 1984, and also said it expected unemployment to drop. Fed Chair Jerome Powell added that inflation was forecast to reach 2.4% this year, but called it a temporary surge. The biggest news was a pledge not to raise interest rates until 2024 and the continuation of an asset purchase program in which the central bank buys at least $120B of bonds per month.

Some are wondering if the Fed is so confident in the outlook, why not raise rates sooner? The Fed's new framework that it rolled out last August wants to let inflation run consistently above its 2% target, as well as keeping rates steady until it sees maximum employment. The central bank may also want to view that "surge in activity" as durable, before proceeding to tighten monetary policy.

Cue the inflation concerns: Stocks staged an afternoon rally on Wednesday following the news, including the beaten-down tech sector, but mellowed in overnight trading as Treasury yields soared. At the time of writing, the yield on the 10-year Treasury was up 10 bps to 1.74%, while futures linked to the Nasdaq were off 1.3%, continuing a rotation from growth stocks to value. Inflation concerns continue to rattle investors as the yield curve steepens, with some concerned by the fact that Powell was quick to dismiss inflation as being short-term in nature. "Powell and the Fed did a pretty good job of navigating an uncertain market and delivered just enough to make sure equity volatility didn't rise, but that said, it hasn't put a cap on yields," said Edward Park, chief investment officer at Brooks Macdonald.

Policy around the globe: Even as the U.K. economic outlook brightens, the Bank of England will likely emphasize its high bar for tightening monetary policy in its decision today, matching a message from the Fed Chair Jay Powell. Meanwhile, reports suggest the Bank of Japan will agree to allow yields to trade in a wider band when it ends a two-day policy meeting on Friday.

Economy - Reopening theme

Many entertainment venues that were shut down more than a year are starting to show signs of life as companies continue to make reopening announcements. The theme can be clearly seen in financial markets, where the cyclical trade has been on fire. The Dow Jones Industrial Average (NYSEARCA:DIA) closed at a record 33,015.37 on Wednesday, just five trading days after clearing the 32,000 milestone (get out your "Dow 33K" caps).

The latest? Disneyland (DIS) in Anaheim, California will reopen April 30, with the parks operating at around 15% capacity to start. "I think as people become vaccinated, they become a little bit more confident in the fact that they can travel, and, you know, stay Covid-free," CEO Bob Chapek told CNBC. "Consumers trust Disney to do the right thing, and we've certainly proven that we can [open] responsibly, whether it’s temperature checks, masks, social distancing, [or] improved hygiene around the parks."

That's not all. AMC Entertainment (NYSE:AMC) anticipates that 98% of its U.S. circuit will be open by Friday following the theater chain's toughest year in history. AMC repeatedly came close to filing for Chapter 11 in 2020 and saw most new films delayed because of the coronavirus pandemic. Reopened theaters will still have capacity restrictions to allow movie goers to social-distance and will "operate with the highest devotion to the health and safety." AMC +4% premarket.

Outlook: Corporations are not the only ones experiencing a windfall from a broader vaccine rollout and declining COVID caseloads. More than half of U.S. small businesses are fully reopened as many local restrictions were lifted, according to a report from Kabbage, a fintech owned by American Express (AXP). Will pre-pandemic commercial occupancy rates return? 33% of surveyed businesses said they would expand digital operations to supplement or replace in-person operations, while only 15% would scale back digital operations to pre-pandemic levels.

Covid - Vaccine trust

Medical experts in the U.S. are trying to calm fears that COVID-19 vaccines may be unsafe after several European countries suspended AstraZeneca's (NASDAQ:AZN) jab amid reports of blood clots among some recipients. The European Medicines Agency, which evaluates drug safety for the EU, has maintained that the benefits of the shot when it comes to preventing hospitalizations and deaths still "outweigh the risks of side effects." It has called a meeting for today to release its findings, while the World Health Organization has subsequently agreed with the verdict, urging countries on Wednesday to continue using AstraZeneca's vaccines.

Bigger picture: It's hard to say whether the inoculations are causing the reported blood clots without more data. Medical events in the older population occur every day, even without vaccines, and it is hard to determine whether vaccines can accelerate, precipitate or cause these events. Of the more than 17M people in the EU and the U.K. who have received a dose of the Oxford-AstraZeneca vaccine, fewer than 40 cases of blood clots had been reported as of last week.

What's clear is that AstraZeneca has a public relations mess on its hands. "There's now been a pall over this vaccine," said Dr. William Schaffner, an epidemiologist and professor of preventive medicine at Vanderbilt University. "I think if the vaccine is cleared - not guilty - there will have to be a substantial PR effort made in Europe and around the world in order to restore confidence in this vaccine.

Go deeper: When Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) initially distributed their vaccines in December, there were reports of severe allergic reactions, or anaphylaxis. However, those cases appear to be rare, according to Dr. Anthony Fauci, with the U.S. having administered 113M doses to date. "Thus far, and you have to keep following these things very carefully, there are no safety signals that turn out to be red flags," he said regarding the currently deployed vaccines in the U.S. While the AstraZeneca vaccine hasn't been cleared for American use, there will likely be enough safety and efficacy data to grant the vaccine emergency use authorization in April.

Global - China policy

Beijing will seek a meeting between President Biden and Xi Jinping next month if today's first high-level U.S.-China talks in Alaska are productive, WSJ reports. The meeting as envisioned by Chinese officials would be organized around Earth Day to show both leaders are focused on the fight against climate change, though the U.S. is wary that China will try to use the issue to get Washington to back off in other areas. Both sides have set low expectations for the talks in Anchorage, which will feature Secretary of State Antony Blinken and National Security Adviser Jake Sullivan.

Thought bubble: Biden has continued to take somewhat of a hard line against China and has not been quick to unravel the tariffs and sanctions imposed during the Trump presidency. This week, the Biden administration even expanded penalties on Chinese officials that have "undermined Hong Kong’s autonomy from Beijing," while the Commerce Department served subpoenas on multiple Chinese companies that could threaten national security.

China's goal: Beijing hopes to renew the so-called strategic dialogue format, which was put in place during the Bush administration and continued through the Obama years. The framework set up recurring meetings to hash out differences in economic, trade, security and other areas, but was abolished under Trump due to "endless discussions." Beijing also wants the U.S. to drop limits on American sales to Chinese firms like Huawei and Semiconductor Manufacturing International (OTCQX:SMICY), as well as visa restrictions on Communist Party members, Chinese students and state media journalists.

U.S. goal: Washington sees the meeting as a way to present American complaints about Chinese actions, such as curtailing freedoms in Hong Kong, naval expansion in the South China Sea, economic pressure on U.S. allies, intellectual property violations and cybersecurity breaches (recent Microsoft hack?). The U.S. also plans to discuss ways the two countries could work together on topics like climate-related issues and global health.

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