Gimme more stimmy
Let me introduce you to a recurring theme for February economic data – the winter weather typical in the northeast made an appearance in the sunbelt during the month and the whole system went bananas. The weather impacted retail sales, which fell 3% for February after jumping 7.6% in January. Online shopping continued to boom and is up nearly 26% compared to last year while spending at restaurants and bars is still down about 17% compared to last year.
Moral of the story: The second round of stimmy made its way into checking accounts over the last week and retail sales are expected to rebound in March. Not only do many consumers have an extra $1.4k in their wallets, the weather is improving and more people are getting vaccinated. All still pointing to a nice boost in consumer spending ahead as we start to get our lives back on track.
Industrial production slipped 2.2% for February, mainly driven by (say it with me now) the weather. Excluding that, industrial production would have been down closer to 0.5%. There have also been some supply chain issues that have made it difficult for producers to access all their required inputs– we kind of blew through excess inventory and production just hasn’t gotten back up to levels we need for that inventory to be backfilled completely.
Moral of the story: The momentum in recovery of this part of our economy has been quite positive and the data for February isn’t indicative of the underlying conditions given the weather impact. Industrial production has definitely rebounded nicely since the pandemic lows though still remains below pre-COVID levels.
The market reacted to two big things that came from the Federal Reserve this week. First, the Fed increased its expectation for economic growth and inflation but still indicated no plans to put the brakes on the current accommodative policy (keeping interest rates near zero and pumping lots of cash into the economy). The market reacted positively to this announcement but the same cannot be said for the Fed’s second announcement. The Fed had enacted an exemption that had relaxed banks’ capital requirements during 2020 to ease pressures on the financial system at the onset of the pandemic. The Fed declined to extend this rule, which caused bank stocks to take quite the tumble on Friday.
Moral of the story: Markets have been antsy about inflation recently, which has caused government bond yields to rise to pre-COVID levels because investors are worried about inflation reducing the principal of their fixed income investments (like bonds). Inflation isn’t great for bonds because it means that the future interest payments you receive are worth less in real dollars. Rising bond yields come with falling prices, which happens when there are more investors trying to sell than buy (just like it would happen with stocks). Even though the Fed expects inflation to rise slightly above 2% this year, they believe it’s going to be temporary in nature and, therefore, doesn’t justify moving away from their accommodative policies because unemployment is still a big issue.
I’ll be taking a much-needed break from the markets this coming week – we’ll be back in your inboxes in April!