The 10-year Treasury yield rose to 1.13% last week, ‘despite’ the political disturbances in Washington. There was no flight to safety, pushing yields down, just a realisation, that more, not less spending was now inevitable. The Republicans are deeply split.
The focus will be on the curves: these are all close to recent, historic lows for break-even rates. In some cases, the break-even curve has inverted, notably 10-years minus 5-years (see chart).
This is instructive in the context of yesterday’s commentary on robots. The rapid rebound in orders for industrial robots during 2020 is a reminder that the secular forces behind disinflation have not gone away. An emboldened Congress may aim and secure a Federal-wide minimum wage of $15 per hour. But this may accelerate automation, supressing the increase in unit labour cost. As noted in previous commentaries, the rise in core inflation expected this year (and possibly next) may not be enduring.
The recovery in oil prices, and rebound in energy stocks, has given the S&P 500 a lift this week, but IT and communication services have understandably lagged. Real estate has underperformed too. All three sectors stand to lose if the Biden administration is unable to restrain angry Democrats in Congress. Excessive fiscal stimulus and a concerted attack on ‘big tech’ could mark the end of the bull market.
Summary
• Energy stocks boost S&P 500 to new highs
• But short-term inflation expectations and real yields also up
• Threat to equity valuations: can Tesla keep going?
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