Robust data = record highs for stocks, Treasuries correlation broken

It appears Wall Street needs to rip up the reflation trade script.  Financial markets are no longer trading on the prospects of better growth, but on the actual evidence that the economy is strongly improving.  The days of improving data triggering a bond market selloff are tentatively gone.  To the surprise of many traders, an outstanding retail sales print, a pandemic low for jobless claims, and mostly good earnings, was not accompanied with the steepening of the yield curve.

With the US poised to reach herd immunity by early June, investors will look to see if the required “data-driven” evidence for the Fed is strong enough to warrant an adjustment in policy.  The effects of Biden’s recent stimulus measures and tremendous pent-up demand with the US consumer will send this economy into overdrive.  The next couple of months of data will show the economy is booming, but a lot of that has already been priced in.

Some bond traders are throwing in the towel with their bearish bets, so the 10-year Treasury yield could set aim for 1.50%, before stabilizing.  Never-ending supply will be the theme for the bond market which will be accompanied by central bank purchases and hedges that are tied to financial bond issuance.

The S&P 500 index made a fresh record high after a robust round of economic data, a steep drop in Treasury yields, and solid bank earnings.  Asia will open higher solely on the plunge with global bond yields, but sustained momentum throughout the session might be difficult.  The PBOC is tightening liquidity and that could remain a headwind for Chinese stocks.

US retail sales sparkle, jobless claims fall

US retail sales skyrocketed 9.8% in March, a reflection of the power of stimulus checks and the reopening of many states.  The American consumer was buying cars, clothing, electronics and furniture.  As more people become vaccinated and return to the office, restaurants and pubs should continue to see relentless support.

Jobless claims dropped to 576,000, a new pandemic low last week, but still historically high.  Many investors have been ignoring the weekly claims release as much of the other economic data suggested the labor market was already in healing mode.

Both the Empire Manufacturing survey and Philly Fed business outlook showed manufacturers were beneficiaries to the economic recovery.  NY state saw the highest reading since 2017, while the Philly index posted the best reading in nearly 50 years.  Businesses are adding to their payrolls and price pressures are growing and will soon impact the consumer.  The economic data for the other regional surveys should reflect this optimism.

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