The QQQ Is Correcting, Other Indexes Are Consolidating (Technically Speaking For 3/9)
- Central banks face a challenging few weeks.
- The latest stimulus is pure Keynes.
- The markets are still mostly consolidating.
The latest round of central bank meetings will be challenging (emphasis added):
Optimism that Covid-19 vaccines and continued government stimulus offer an escape from the worst health crisis in a century has sent bond yields soaring and pushed bets on rising inflation in the U.S. to the highest in a decade.
That’s shifting the ground underneath monetary policy makers who promise to maintain rock bottom borrowing costs and cheap money well into the expansion. In the next two weeks, the Federal Reserve and European Central Bank as well as their counterparts in Japan, U.K, and Canada are all likely to reiterate those pledges, eager to secure a rebound in hiring and avoid the mistakes of the last crisis when some withdrew support too early.
The risk now seems skewed the other way. While policy makers welcome a modest rise in bond yields as a signal of confidence in the economic outlook, they worry an unchecked jump would undercut recoveries. They argue any resurgence in inflation will be based on a temporary correction from last year’s slide and that high unemployment will continue to restrain price pressures.
I think the reality is actually far simpler. First, as I noted in my weekend column, interest rates are returning to levels associated with an economic expansion. Although the pace of that move is unsettling markets, the underlying reason for the increase in yields is positive. Second, so far the rise in pricing pressure is temporary, caused by a combination of rising demand and virus-caused supply chain disruption. Expect central banks to stay their ground. What we're looking for in the next round of communications is any hint that banks are rethinking their support.
The second stimulus bill is mostly Keynesian stimulus:
President Biden’s stimulus package, which passed the Senate on Saturday, represents one of the most generous expansions of aid to the poor in recent history, while also showering thousands or, in some cases, tens of thousands of dollars on American families navigating the coronavirus pandemic.
The marginal propensity to consume states that people with lower incomes are more likely to spend money because the received money represents a larger percentage of their income. This leads to more transactions, increasing monetary velocity, and thereby economic activity.
The recent run-up in treasury yields is more a function of rising term premiums than inflation expectations:
The bigger factor in the rise in the break-even rate seems to be an increase in term premiums, not higher expected inflation. Term premiums are essentially the extra yield investors demand over what they think is appropriate for a Treasury to compensate for the possibility their view is wrong...
Term premiums aren’t directly observable, but economists have come up with models to infer them. These show that, while the term premiums remain negative, they aren’t as negative as they were back in the fall. A Federal Reserve Bank of New York model, for example, shows a term premium on the 10-year Treasury of negative 0.34% versus negative 0.75% at the end of October. That less negative term premium makes for higher Treasury yields and a higher break-even rate.
Let's take a look at today's performance tables:What a difference a day makes. Today, two indexes were up nearly 4%, with the QQQ - yesterday's big loser - seeing a major rebound. Also note that the long-end of the treasury market moved higher as well.
The strong move in technology explains why the QQQ had such a strong rally. The 1.08% move in communication services didn't hurt. Utilities gained due to the treasury market rally, which sent yields lower.
Despite all the hoopla during the last few weeks, the markets are still mostly consolidating.IWM 3-month
The IWM is still trending modestly lower in a downward-sloping channel. SPY 3-Month
The SPY is contained in a broad triangle formation.
The exception is the QQQ:
The QQQ is in a downward-sloping channel.
The markets still feel as though they're transitioning from the expectation of a rebound to a, "we've already had a massive rally and are now rethinking our market assumptions," posture.
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