Overview: Stocks were volatile across the globe last week. Interest rates continued to rise, as investors weigh both inflation risks and the impact of fiscal stimulus on global economic growth. In the U.S., the S&P 500 Index fell -2.4%, with international developed stocks down –2.8%, and emerging markets retreating -6.3% for the week. The 10-year Treasury note rose in yield to 1.46%, its highest level since February 2020, as investors anticipate stronger growth and inflation. In a quiet week for economic data, the highlight this week will be Friday’s U.S. employment report, where the consensus is for 140,000 new jobs in February, with the unemployment rate expected to remain at 6.3%.

A Note on the Yield Curve (from JP Morgan): A steepening yield curve and rising inflation expectations suggest that some investors are seeing the light at the end of the tunnel. It should be noted that these rates are rising for the right reasons – ongoing vaccinations, a declining number of coronavirus cases and easy monetary policy. Beyond this, investors also seem optimistic about a potential new batch of stimulus checks. When the CARES Act was passed last April, the personal savings rate skyrocketed to 33.7% and averaged 16.2% for the year, up 116% from 2019. However, Americans did not become exceedingly cautious as the rise in the personal savings rate might suggest; rather, these cash injections boosted personal income at a time when spending was constrained by the pandemic. Furthermore, these checks were the same dollar amount for individuals up to $75,000 in income. This represents a much bigger percentage increase in income for poorer households, which have a higher propensity to spend, rather than save, income. This should fuel strong consumption and gross domestic product (GDP) growth in late 2021 and early 2022 as pent-up demand is released. If this is the case, stronger real growth, lower unemployment and higher inflation may become a reality sooner than the Fed expects. The recent increase in rates has been driven by real rates, which may indicate why some investors are beginning to question how long the Fed can stay on the sidelines. We believe this will be a good year for risk assets, but acknowledge that the tension between better growth and an easy Fed will keep volatility elevated throughout 2021.

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