US Open: Financials soar, PCE inflation sends Yields lower, EUR rebounds

Key gauges of the health of the US consumer will not get much attention since these February readings come in between massive stimulus bills.  US household spending fell by 1.0% and personal income plunged by 7.1% in February.

The key economic release of the morning was the February PCE Deflator reading, Fed’s favorite inflation indicator.  Treasury yields declined after a slightly softer-than-expected PCE Deflator reading suggested inflation is not yet starting to rear its ugly head. 

US stocks want to climb higher given the reopening trade got another boost after President Biden doubled his vaccine goal for his first 100 days.  Softer-than-expected PCE deflator data support the idea that Treasury yields will likely consolidate over the short-term.  The lower the baseline for inflation, the easier markets can become convinced that the upcoming pricing pressure surge will be transitory.   

Financials are rejoicing at the news that many of the Fed’s restrictions on bank dividends and share repurchases will end after June 30.  Financial stocks are the second-best sector this year after energy stocks.  When global COVID-19 cases start trending lower, banking stocks will benefit from rising bond yields. 

EUR

The euro was boosted higher after German businesses became upbeat about the economic outlook despite the short-term headwinds from lockdowns and a disappointing vaccine rollout.  The IFO business climate index improved to 96.6, higher than the 93.2 forecast and upwardly revised 92.7 prior reading.  The IFO President Fuest noted that “despite the rising rate of infections, the German economy is entering the spring with confidence.”  Ifo economist Klaus Wohlrabe noted that Germany was likely to shrink by 0.7% in the first quarter.

The bottom might be in place for the euro, today’s German optimism helps, but the temporary cap in the surge with bond yields is likely the bigger driver.    

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