Reserve just reiterated its intention to maintain its ultra-accommodative monetary policy while increasing its forecast for economic growth.
The vaccine rollout continues to accelerate, which is critical for the successful reopening.
While February’s economic readings were impacted by severe winter weather, we are seeing strong early readings for March. Coupled with the massive economic stimulus (estimates show that more than half of the $422 billion in stimulus funds have gone
into consumer’s bank accounts as of last week) that will support spending, we remain confident on our outlook for economic improvement that will support corporate profits and ultimately stock prices.
Accommodative Federal ReserveAt last week’s FOMC meeting, the Fed reinforced its ultra-accommodative policy stance through an updated set of interest rate and economic projections. The committee maintained the federal funds rate target range of 0-0.25% and the current pace of asset purchases at a significant $120 billion per month. They also reiterated their intention to keep interest rates at this low level for the foreseeable future.
Notably, the Fed materially upgraded its economic growth projection from 4.2% to 6.5% y/y in the fourth quarter of 2021. The Fed also raised its inflation forecast for 2021 but expects inflation to cool next year – signaling that they view any near-term inflationary pressures as transient. These estimates reflect the Fed’s view that growth will accelerate this year and moderate thereafter.
Successful Vaccine RolloutEstimates now show that U.S. production of the three approved vaccines (Pfizer, Moderna, and J&J) is expected to reach 132 million doses in March compared to only 48 million in February as production processes ramp up and get streamlined. We are now up to an average of 2.5 million doses a day being administered in the U.S. with nearly a quarter of the U.S. population having received at least one dose of a COVID-19 vaccine.
We also just got news of AstraZeneca’s successful U.S. trials that showed their vaccine is safe and 79% effective. This provides a vote of confidence for their shot and a pathway for its authorization as the fourth available vaccine in the U.S. These positive developments on the vaccine front are critical for the ultimate normalization of economic activity.
Leading Indicators Support Positive OutlookThe Conference Board’s Leading Economic Index (LEI) rose for the 10th consecutive month in February, a sign of continued economic recovery, even before the passage of the American Rescue Plan. The six-month rate of change of the LEI eased to 3.8%, but that was still more than double the average pace in the previous expansion. Additionally, the six-month diffusion index returned to 90%, matching its highest level since mid-2018, a sign of broad-based growth.
Severe winter weather had a negative impact on February’s retail sales, industrial production, and housing starts. However, we expect strong readings from these metrics in the coming months. While down from January’ surge, retail sales were still up 6% on a year/year trend basis, the most since March 2012. Future retail sales will be supported by the economy reopening and the massive stimulus.
Early manufacturing readings for March are also very strong. The Empire State General Business Conditions Index reached its highest level since November 2018 in March and well above consensus estimates. Meanwhile, the March Philly Fed General Business Conditions Index jumped to its highest level since April 1973. These regional Fed readings bode well for the broader manufacturing indexes that will be out later this month. While winter storms wreaked havoc on February housing starts, builder confidence remains high and we expect further strength in housing as we move further into spring.
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