Church bells rang. This was the fastest way to spread the news. The speed of sound was even faster, and more effective in communicating that something had changed than was the telegraph for common folk. Townspeople from all across what was still these "united" States gathered in town centers in order to learn what this commotion was all about. July 4th, the birth date of a nation, in 1863, also as it happened, became the date that that word... the word "united" became not just an adjective but part of a proper name.
On July 4th, 1863, Confederate Lt. General John C. Pemberton surrendered the city of Vicksburg, Mississippi and his army of nearly 30K soldiers to Union Major General Ulysses S. Grant and his "Army of the Tennessee" effectively splitting the Confederacy in two and ceding control of the Mississippi River to the U.S. Navy.
Roughly 1,000 miles to the northeast of Vicksburg, at roughly the same time, Confederate General Robert E. Lee's "Army of Northern Virginia", after making an incredible error in judgement broke contact with Union Major General George Meade's "Army of the Potomac" after suffering a decisive defeat on the third day of fighting at the Pennsylvania crossroads and retreated back toward Virginia. A second consecutive year that an invasion of northern territory had failed and this time there would be no way to replace the troops or resources that had been lost. This time it was different.
The war was not nearly over, but the 87th "Independence Day" was indeed the turning point that historians would point to from that point on, and that President Lincoln had yearned for, up until that day. The military forces of the Confederacy had seen their best day, and would never again enjoy a major victory over a large union army. July 4th, 1863 was the day that many no longer thought of themselves as being from New York, Massachusetts, or Michigan, or Wisconsin, but as simply being "American."
The Sound of Silence
Not quite the day of impact that perhaps July 4th, 1863 had been, but on the morning of Saturday, March 6th, 2021, news passed from various media sources, silently. Modern methods of communications had the story simply "pop up" on smartphone and tablets while the majority of Americans slept. Turning point of another war? We can only hope.
By now, all who care to know, are well aware that the U.S. Senate, in a strictly partisan vote, passed by a 50-49 margin (after one Republican senator had to leave the chamber due to a death in the family) President Biden's $1.9T Covid relief/economic support fiscal plan, making an expected tie breaking vote by Vice President Harris unnecessary. The bill now heads back to the House of Representative for a Tuesday re-vote on the changes made in the Senate where it is expected to pass easily, and then onto the President's desk for a signature.
Whether this stimulus bill, which I believe is the sixth, will be seen as a turning point or whether or not that turning point had already happened, I will leave untold for I am no seer. That said, there is now no doubt that the United States from an economics perspective has fully embraced a war footing. While macro-economic data had already been improving year over year quite dramatically across a wide swath of economic data-points, the labor market remains 9.5 million jobs short of where it was one year ago, and even after what has been seen as a very strong month of February in terms of job creation, the vast majority of that renewal in demand for labor came from bars and restaurants. Not exactly what I would call a smooth, or high quality recovery. At least not yet.
What's inside? We can debate over the pork barrel spending, or the necessity of such a large package while roughly $1 trillion of unused funds remain untapped from the "Trump era" fiscal support packages, and that would be fodder for valid debate. The "goods" though do include another round of helicopter money. Most Americans will end up on the receiving end of $1,400 stimulus checks to finally get the $600 checks doled out last December up to the $2,000 number that President Trump had originally thrown around.
In addition, the weekly federal stipend of $300 to state level jobless benefits will be extended into September (from March), $350 billion will be set aside for aid to state and local governments, there will be an expansion of a tax credit for children, as well as new funds to help reopen schools safely and expedite the rollout of Covid-19 vaccination programs. What did not make the cut, and will surely come up again at some later date, is the concept of a $15 an hour federal minimum wage, which is in my opinion, a worthy idea, but also in my opinion, one that must be brought to a vote while labor markets are strong, not while a nation tries to rebuild already broken demand for labor coming out of a pandemic. One would think that to be merely common sense.
Treasury security markets are reacting as one might think. The US Ten Year Note gives up more than 1.6% while I write this note, and has yielded more than 1.61% overnight. The Thirty Year Bond has not reacted the same way, and has for the most part, yielded between 2.3% and and 2.32% all night long, well below the 2.35% high yield of last week. Interestingly yields at the short end of the curve have contracted overnight. 90 day paper gives up as little as 0.035% very early on Monday morning after yielding more than 0.05% on Sunday night. Three, Five and Seven year notes have all mimicked the action seen for the Ten Year overnight, while the Two Year Note has flatlined.
While the most focused upon Treasury yield spreads are expanding overnight, there is also visible U.S. dollar strength and weakness across the equity index futures space, most notably where that weakness existed last week, in tech, in growth, and at the Nasdaq. Early signs are that markets will at least try to resume the rotation that has favored cyclicals and stocks of companies with strong fundamentals over stocks of companies that either promise more in the future than can be delivered in the present or have run with valuations for several years that make much less sense in a tighter monetary environment.
On that, make no mistake. financial markets are responding to expectations for much looser fiscal conditions through the lens of tightening monetary conditions with or without the support of monetary authorities.
What To Focus On
Know this. All investment decision making will now likely hinge on expectations for central bank posture moving forward. The Fed has just moved into its "blackout period" ahead of the St. Patrick's Day FOMC policy decision. Investors and algorithms alike will not have any Fed speak to react to for about a week and a half.
What we will have is February CPI data to ponder this Wednesday, and expectations are for some visible consumer levels inflation at least at the headline level. The PPI which had already been getting a bit hot, is expected to have gotten even hotter. We get our check on producer prices this Friday.
Perhaps most importantly, the U.S. Treasury goes to market this Wednesday with $38 billion worth of Ten Year paper, and this Thursday with $24 billion worth of Thirty Year bonds. Without the Fed around to say whatever creeps into their greasy little heads whenever it does creep into their heads, nothing, and I mean nothing will be more important this week than the perceived health of those two auctions. If investors, including foreign central banks, show little appetite for U.S. debt of longer dated maturities ahead of the March 17th FOMC meeting, "they" (traders) are going to beat this market like a drum. That, my friends... will force the turning point.
The word transitory comes up a lot. We see it everywhere. I have no idea how transitory recent inflationary trends are. Neither does anyone sitting at the table of the FOMC. Velocity remains the most important ingredient there. Inflation can force urgency, and thus... velocity, but certainly not comfort across the lower to middle class U.S. consumer base.
In addition, as Randall Forsythe points out in his column at Barron's this past weekend, "interest costs one percentage point above the CBO's baseline estimate would add $9.7 trillion to the deficit from 2021 to 2030." We all wrote and talked about a renewal of "Operation Twist" last week, especially after the Reserve Bank of Australia attempted to enforce its own version of yield curve control upon its own sovereign slope. Is this where the Fed is ultimately forced to go? The federal government is already in over its head, and has been for years. That same government is going to try to launch an infrastructure rebuild later this year that will make $1.9 trillion in new funds created just to be borrowed... seem like "Monopoly" money, and may end up just as valuable. Oh and then, as technological progress forces more and more folks either out of work or out of high paying jobs, there will be more helicopter money, and then more.
How does this all end? I don't know that it does end. At some point, the Fed adopts a more aggressive stance with the long end of the maturity curve in an effort to keep the economic recovery from stalling. This will for a while preserve the federal government's ability to service its debt. This will for a time suppress short term inflation at the expense of long term growth. This will bring about sooner rather than later the adoption of Modern Monetary Theory as something more than a ridiculous outlier concept, not because the idea is not ridiculous, but out of desperation. The most important thing to focus on is the perception of U.S. economic exceptionalism, realm or imagined. For without that "pie in the sky", there will be no demand for U.S. debt outside of wherever it is that the central bank decides that it itself will pay for the product. That is your turning point on the gender scale.
Oh, There's More...
... For those that maybe do not follow the data around Covid quite as closely as others... the numbers have stopped improving quite so dramatically. Dr. Fauci's not wrong, and he's not being alarmist when he says that we are plateauing at too high a level. We indeed are plateauing too high. This becomes a race at this point between the vaccines already in circulation and the mutating virus.
Need Some Good News?
Sure you do. Scientists now believe that the virus may only have so many moves left that can be made without negatively impacting its ability to pry open and invade human cells in order to replicate. The down side would be that nobody knows how long that takes, so you still have to use your heads when out and about. So, use your heads. Need more good news? Opening Day is just 24 days out. Let's go Mets. Let's go Pfizer (PFE) , Let's go Moderna (MRNA) , Let's go Johnson & Johnson (JNJ) .
Economics (All Times Eastern)
10:00 - Wholesale Inventories (Jan): Expecting 1.3% m/m, Last 0.5% m/m.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)