• It was a mixed, but broadly positive day for Wall Street with the S&P 500 closing with modest gains of about 0.2%.
  • Falling bond yields and further dovish tilting Fedspeak may have helped equities.
  • Equities await Biden’s stimulus plan and a speech from FOMC Chairman Jerome Powell on Thursday.

It was a mixed, but broadly positive day for Wall Street in the end; the S&P 500 closed with modest gains of about 0.2%, having again slipped briefly into the 3780 (in pre-market trade) and again pushed back to the north of the 3800 mark, though the index is still struggling to test its all-time highs set last Friday. Meanwhile, the Dow Jones Industrial Average was flat (still trade above 31,000) and the Nasdaq 100 index rose 0.6% but was just about unable to reclaim the 13000 level. The Russell 2000 (small-cap stocks) underperformed amid profit-taking after the index hit fresh all-time highs earlier in the week.  

No particular theme was behind the rise in equities; US bond yields fell and the curve flattened for a second day in a row (this could have helped equities). Putting pressure on yields and curve steepeners has been 1) strong demand for US debt at Tuesday’s 10-year and Wednesday’s 30-year auctions and 2) various Fed members sounding reluctant to be drawn into talking about the Fed winding down its QE programme any time soon (more on this from Fed Chair Jerome Powell on Thursday). Of course, dovish Fed commentary itself likely also helped stocks markets just as it pressured yields.

In terms of individual movers; chipmaker Intel (INTC) was up 7% after the company announced that it had replaced its CEO, Bob Swan, with VMWare’s CEO Pat Gelsinger amid activist pressure (VMWare’s stock price dropped 6.8%).

December inflation numbers showed headline inflation rising to 1.4% YoY, still well below the Fed’s 2% target, though inflation is expected to rise significantly in the months ahead (hence why markets were unreactive). Markets were also unreactive to the publishing of the Fed’s latest Beige Book, a summary of US economic health. A key point emphasised in the latest report was that “although the prospect of COVID-19 vaccines has bolstered business optimism for 2021 growth, this has been tempered by concern over the recent virus resurgence and the implications for near-term business conditions”.

What to watch this week

Impeachment theatrics will likely steal much of the headlines in the press until the end of the week but are unlikely to affect markets much. Indeed, the US House just voted to impeach the President, with the Democrat majority backed by a number of angry House Republicans. However, the Leader of the Senate Republican Minority Mitch McConnell has indicated that he will not consent to reconvene the Senate immediately, meaning that there is practically no chance that a vote on US President Donald Trump’s impeachment will be possible in the Senate before the end of his term in office.

That means impeachment will have to happen under the Biden administration, something which some fear might get in the way of/distract from the Biden administration’s legislative priorities, such as further Covid-19 aid. However, any delays ought not to be more than a few weeks which will matter little to the US economic outlook and thus ought not to matter too much to markets.

Much more important for the stock market for the rest of the week will be the incoming US President Joe Biden’s stimulus plan announcement on Thursday, as well as a speech by the Chairman of the Federal Reserve Jerome Powell. On the former, details leaked on Wednesday indicated the plan will include generous benefits for poor and middle-class families with children. On the latter, markets are on the lookout for what Powell says regarding the bank’s plans to eventually taper its asset purchase programme; as other Fed officials like Fed Vice Chairman Richard Clarida, he is likely to say something along the lines of it being far too soon to be thinking about tapering and that the current pace of purchases is likely to be appropriate at least through 2021. Meanwhile, earnings season kicks off on Friday with earnings from some of the big US banks.