Equity markets surged higher on expectations that Washington DC is poised to deliver more financial stimulus. The Senate runoff races in Georgia were both won by Democrats and they have been promising $2000 stimulus checks to a large portion of the U.S. population. As a result, inflation expectations and a potential rise in economic activity fueled the S&P 500 index to a 1.59% gain last week. Cyclicals led the way as Energy, Materials and Financials were the top three sectors. Oil rallied to over $50 for the first time since last February on news that Saudi Arabia decided to cut oil production as inventories are falling. News headlines on the size of Government stimulus will likely push stocks higher or lower. The 10-year Treasury went from 92bps to 112bps last week and as stimulus expectations grow its likely that inflation and interest rate expectations will grow in lockstep.
Longer-term Treasury yields began the year moving significantly higher last week, with the U.S. 10-year Treasury yield rising above 1% for the first time since March. Yields rose after Democrats won control of the Senate, winning both runoff elections in Georgia, as the market priced in more economic stimulus and higher inflation. The 10-year breakeven rate, which gauges the market’s expectation of inflation, topped 2% for the first time since 2018 last week. The jobs report released on Friday showed the U.S. lost 140,000 jobs in December, which broke a streak of 7 months of job growth since the economy lost over 20 million jobs in April. Restaurants and bars bore the brunt of the decline, losing 372,000 jobs last month. The unemployment rate remained at 6.7%, which remains elevated from pre-pandemic levels but is still a significant recovery from the 14.8% unemployment rate in April.
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