All systems go? Not quite.
You knew that I'd find something wrong with Monday's rally. I mean everything came up roses -- except, that is, for what matters most, that being broad participation. Too bad. The prices sure did look nice. To make it stick, we'll need what is known as a "follow through" day and right now, as darkness reigns, equity index futures feel quite heavy. That said, price discovery at this time of night/morning can be less than meaningful.
Let's take a look at Monday's session, shall we?
All of our most closely watched small-to mid-to large-cap indices had great days. The S&P 500 took back, on Monday alone, nearly all of the ground lost last week. The Nasdaq Composite tacked a 3% increase on top of Friday's smaller rally. All 11 S&P sectors shaded green for the day, and 10 of those 11, using Select Sector SPDR ETFs as proxies, showed gains of at least 1% for the session. Heck, eight of the 11 showed gains of 2% or better, while the Technology ( (XLK) ), and Financial ( (XLF) ) SPDRs each gained more than 3%.
The rally was indeed quite robust... looking. At the New York Stock Exchange, winners beat losers by 4 to 1, while advancing volume beat declining volume by a rough 5 to 1. Up at Times Square, winners beat losers by close to 9 to 2, while advancing volume beat declining volume by almost the exact same 5 to 1 that we experienced downtown. Oh, just one thing. Aggregate trading volume decreased dramatically, not just from Friday, but also from the previous Monday for comparison's sake. In fact, aggregate trading volume for names constituent to the Nasdaq Composite not only landed 26% below the 50-day trading volume simple moving average, it was also the lowest volume day for the Composite since New Year's Eve. Trading volume in names constituent to the S&P 500 also failed to reach the 50-day trading volume SMA for that index for the first time since Feb. 18.
Lowest Naz volume of the year.— Helene Meisler (@hmeisler) March 1, 2021
The S&P 500 took back a nasty week in one day. The Nasdaq Composite even re-took the 21-day EMA (exponential moving average), which is a shorter-term or "swing" trading tool, but the fact is that the action was in no way convincing.
Portfolio managers who reduced risk over the second half of the last week of February did not feel compelled to immediately put that newly created cash back to work, at least not in equities. That could also mean that there is some dry powder out there.
How interesting is it that the catalyst for Monday's rally had been the action taken by a foreign central bank, the Reserve Bank of Australia, to enforce control over that nation's sovereign debt yield curve? Traders wondered if Fed officials would try to jawbone the Treasury yield curve here in the U.S., and talk erupted in economic circles about just what the FOMC could do to enforce such control at home. The words "Operation Twist" bounced around from one group to the next.
One thing was certain, the RBA had taken a bold step and that step had tamed bond sellers at least for the moment. This kept at least for Monday, the yield for the U.S. 10-Year Note below the 1.48% S&P 500 average dividend yield. That spot is key.
The 10-year yield peaked at 1.45% on Monday, and has traded around the 1.44% mark as I have worked my way through this market note. How curious it is that news from another central bank would also impact Monday's environment?
We also learned that the European Central Bank had purchased just EUR12 billion worth of debt under the Pandemic Emergency Purchase Program (PEPP) for the week ended last Wednesday. This was below the EUR17.3 billion purchased the week prior, and also well below the weekly average of EUR18.1 billion since this program's inception almost a year ago.
The ECB placed the blame for the shortfall on increased redemptions, and to be fair, there appeared to be almost no reaction in markets for U.S. Treasury securities.
What Now, Batman?
I'm thinking. Zero-dark thirty. I'll ask the man in the blackened window. Didn't see him for a moment. Thought perhaps I had turned into a vampire. Oh, there he is. Phew. Looking good, dude.
This would be potentially huge should ECB actions not exactly meeting up with ECB words become an actual trend. Euro valuations had been in decline versus the U.S. dollar, but did stabilize above the 120 level on Monday. Is that level important to Madame Lagarde? Still, the U.S. Dollar Index (DXY) pushed its way above the 91 mark for the first time in almost a month, despite the index being overweight versus the Euro. Think about that. That means that the U.S. dollar would have to have strengthened on Monday versus the likes of the Japanese yen, British pound, Canadian dollar and Swiss franc with force and nearly simultaneously. That is for the most part what happened. The dollar was indeed stronger against the yen, pound and franc on Monday. The strength against the Loonie spiked on Friday and largely held the level on Monday.
Crude oil, gold, silver, copper, corn, and wheat all bowed before the rising U.S. dollar on Monday. In fact the Bloomberg Commodity Index fell more than 3.4% in value from the highs of last Wednesday through the lows of Monday afternoon. This is disinflationary (not deflationary), and could be quite welcome or quite the opposite depending on just who you are.
What this may mean could be that the rest of the planet is at least thinking about betting on a U.S. economic recovery that rises much more quickly than perhaps what will be seen across much of the rest of the planet. That would not only place a premium on the U.S. fiat, but also on U.S. sovereign debt, which would in turn enforce that move into the U.S. dollar.
Obviously (I think), the recent hawkish turn at the ECB is most likely simple human error, and might be chalked up to simple incompetence. We'll know more in a few days. The problem with this thesis is that it is sudden. It was just last Thursday that there was almost no global interest in buying seven-year U.S. paper at auction. The U.S. 10-year note and 30-year bond will not come to auction again until next week. That's a long time to wait for confirmation of any change in global perceptions of the U.S. economic recovery, of U.S. monetary conditions (not necessarily policy), of the state of U.S. fiscal stimulus, and of the U.S. currency itself.
Friday, my friends (and I do love you) looms large.
The 800-Pound Gorilla
There is an 800-pound gorilla in the room, and the fact is that trading volumes could be lighter and price discovery less meaningful until that 800-pound gorilla actually throws that weight around. I do not remember a month potentially as meaningful in terms of survey results as will be this Friday's reporting of the BLS (Bureau of Labor Statistics) data on job creation, hours worked, and wage growth for the month of February.
Robust-looking data could slow down President Biden's $1.9 trillion fiscal support package that has passed in the House but could meet with real debate in the Senate. Strong-looking data could also impact expectations for domestic U.S. inflation as well as have implications for the targeting of monetary policy. Currently, futures trading in Chicago are pricing in just a 2% chance of any uptick for the fed funds rate by November. That's down from about 12% early last week.
This is more than a story of labor market demand and supply. This is also a vaccination story, and that picture is rapidly improving right before our eyes. Not only has a third, easier to manage and distribute vaccine joined the fight, but the politicization of vaccination appears to be waning. Recent polling shows that roughly 74% of Americans have now either been vaccinated, are in the process of being vaccinated, or at least are looking forward to being vaccinated. That's a long way from a couple of months ago when there was real concern that even half of the population was willing to be "jabbed." Labor force participation could spike first, making both the unemployment rate and underemployment rate, from a cosmetic point of view, temporarily far worse in real-time. You wanted "a" catalyst? How about twenty?
You see Zoom Video (ZM) ? Whoa.
Like what Walmart (WMT) is doing? Yeah, me too. I think I'll buy some more.
The Biden administration sounding tough on China? If only the two sides of the aisle would agree on something. Oh, wait.
Fun fact: Novavax (NVAX) missed EPS expectations by 46 cents on revenue that increased 3,071% year over year. Oh, and Novavax might just be number four.
Missed Lemonade (LMND) ? Well, here's your dip.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 2.9% y/y.
16:30 - API Oil Inventories (Weekly): Last +1.026M.
The Fed (All Times Eastern)
13:00 - Speaker: Reserve Board Gov. Lael Brainard.
14:00 - Speaker: San Francisco Fed Pres. Mary Daly.