Tuesday, December 22, 2020
Stimulus Bridges to Recovery
Recent economic data shows evidence of slowing momentum in the US economy, but the new stimulus package could keep the recovery moving forward. This week’s Market Signals podcast reviews the stimulus package, economic data, the Federal Reserve’s policy meeting, and a few fun facts from 2020.
Stocks little changed today. European stocks are strong in midday trading after selling off sharply on Monday. Asian markets were under pressure overnight with Chinese stocks underperforming.
Congress passes stimulus bill. On Monday, Congress approved a $900 billion stimulus package.
- The bill includes $248 billion in additional loans for small businesses, $600 stimulus checks for individuals, and 11 additional weeks of enhanced unemployment benefits.
- The bill awaits President Donald Trump’s signature to become a law.
Breakeven inflation rate indicates TIPS likely fairly priced. The principal of Treasury Inflation-Protected Securities (TIPS) changes with inflation as measured by the Consumer Price Index (CPI).
- Because of the added inflation protection, TIPS usually have a much lower yield than similarly dated “nominal” Treasuries.
- TIPS performance relative to similarly dated Treasuries depends on whether inflation is higher or lower than the yield difference, called the breakeven inflation rate.
- Right now, the 10-year breakeven inflation rate is approximately in line with its 10-year historical average at 1.95%.
- Read more on TIPS in today’s LPL Research blog.
Fishing rights the final major barrier for Brexit. In a second LPL Research blog today, we catch up on the state of trade negotiations relating to Brexit, the United Kingdom’s (UK) withdrawal from the European Union (EU), and why fish could be holding up the deal.
- UK and EU Brexit negotiators have until December 31 to arrive at a new trade arrangement.
- Fishing rights are a sensitive issue for the UK, an island nation.
- Failure to reach a deal will result in a “hard Brexit” in which the UK and EU revert to World Trade Organization trade rules.
Technical update. The S&P 500 Index rallied 1.6% off its lows Monday, but still ended with a 0.4% loss. Despite the headline price decline, financials and technology both finished in the green, and Treasury yields ended the day flat. While some areas of the market may be overextended, Monday’s price action showed little indication the market was pricing in economic weakness as it did earlier in the year.
COVID-19 news. The week-over-week change in new COVID-19 cases appears to be leveling off. Case growth in the Upper Midwest has subsided, while case growth in California continues to be a threat (source: The COVID Tracking Project).
- The United States reported 178,000 cases Monday versus the 7-day average of 211,000, marking the third straight day of case growth below the average.
- The BioNTech CEO remains confident that current vaccines will remain effective against the new virus variant found in the United Kingdom.
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