Service Sector Growth, Potential Inflation Triggers, and Has the 10-Year UST Hit Bottom?
January 25, 2021 | FIRESIDE CHARTS
The January Markit flash PMI report offered two pleasant surprises last week with manufacturing growth coming in above expectations and even the battered services sector surprising to the upside. Will this growth, in combination with a booming housing market and stimulus-induced liquidity, be enough to spark inflation? And if so, what can we expect from equities in response? Treasury yields meanwhile slipped on stimulus talks and climbing Covid concerns, but the 10-year UST has also doubled off the bottom. Could a trend reversal be ahead, even as high-yield issuances hit a 10-year YTD high?
1. U.S. manufacturing continues to exceed expectations:
Source: The Daily Shot, from 1/25/21
2. Since the service sector comprises about 70% of the economy, this result is even more significant and is in spite of the pandemic’s effect on many service sectors….
Source: The Daily Shot, from 1/25/21
3. It has taken a decade, but U.S. housing is finally beginning to reach levels that will impact the growth in inflation…
Source: The Chart Store, from 1/25/21
4. Our government’s and the Fed’s stimulus efforts has put $4 trillion of “extra” liquidity into the system. Not only can this be inflationary, it also has to eventually get paid back or withdrawn from the system…
Source: The Daily Shot, from 1/25/21
5. Meanwhile the likelihood of additional stimulus, Fed bond purchases, and the money supply will surge even higher. How much is too much?
Source: The Daily Shot, from 1/25/21
6. Instead of a blast of money to all families making $300,000 or less, would a more targeted approach to those who need the help the most make more sense?
Source: The Daily Shot, from 1/25/21
7. Historically, as inflation and eventually interest rates move higher, equities have faced a headwind. Part of the rally has been due to ultra-low rates and a paltry risk-free rate of return which have boosted equity’s relative appeal. Now static 60/40 portfolios will have to rely almost solely on the equity returns as bonds struggle with rising rates and near-zero coupons. Given the past, overall return expectations may be way ahead of reality…
Source: The Daily Shot, from 1/25/21
8. Half of the small cap surge came in one day…
Source: The Chart Store, from 1/25/21
9. 10-year UST rates have doubled off the bottom. Was it really the bottom for the 35-year trend?
Source: The Chart Store, from 1/25/21
10. Companies whose financial conditions warrant junk status are taking advantage of the historically low rates and the insatiable appetite for yield…
Source: The Daily Shot, from 1/25/21
11. Is this ten-year downtrend broken as well?
Source: The Chart Store, from 1/25/21
12. European manufacturing, while more tepid, is still solidly in expansion mode (reading greater than 50):
Source: The Daily Shot, from 1/25/21
13. …And their service sector is still contracting under the weight of the pandemic and renewed shutdowns
Source: The Daily Shot, from 1/25/21
Disclosure: The charts and infographics contained in this blog are typically based on data obtained from 3rd parties and are believed to be accurate. The commentary included is the opinion of the author and subject to change at any time. Any reference to specific securities or investments are for illustrative purposes only and are not intended as investment advice nor are they a recommendation to take any action. Individual securities mentioned may be held in client accounts. Past performance is no guarantee of future results.