Interest rates have taken a beating over the past few years, but in February, rates started to show signs of life. The 10-year treasury yield hit 1.614% at the end of the month, the highest rate since the coronavirus pandemic began last Spring. It appears that a combination of positive news from mass vaccinations, economic indicators, and a likely third economic stimulus package pushed rates higher.
Still, the Federal Reserve has not budged in its comments that they will not actively raise rates anytime in the near future. But many wonder if the Fed will actually keep to their word if the U.S. economy continues its strong recovery and fears of inflation start to loom large.
The rise in treasury yields has also had its effect on the housing market. Mortgage rates rose throughout the month, with the average 30-year fixed rate coming in at 2.97%. Mortgage rates had started to deviate from the 10-year treasury yield in 2020, something that is a bit of an oddity as both rates generally move hand-in-hand. But February brought a normalization of the old trend, with mortgage rates following treasury yields higher.
Fueled by lower production, oil prices rise
Oil suffered more than most assets in 2020. In fact, the price of oil briefly plummeted below $0 last Spring. Recently, the price of oil is back on the upswing after crude oil crossed $60 per barrel this month. Oil’s rise can be directly contributed by the curbing of supply by OPEC and Russia, who collectively agreed to reduce the commodity’s output by 9.7 million barrels of oil per day. This production cut came as the coronavirus pandemic dropped the demand for oil around the globe. Now, as much of the world begins to reopen, everyone is waiting to see if oil production will once again increase. By suppressing supply, oil prices have risen, but it still makes sense for oil-producing countries to release more supply into the market moving forward. OPEC won’t want to lose market share to its competitors, and also these countries will begin to need the revenue from added production after a year of low production.
But, if oil production doesn’t increase soon, U.S. consumers could be looking at even higher gas prices. Last April prices at the pump fell to a national average of $1.76 per gallon, but prices have been steadily rising and are now at $2.70.
Mixed reviews on U.S. inflation concerns
Throughout the coronavirus recovery, many have raised the concern of inflation for the U.S. dollar. To date, inflation has not reared its ugly head, even as multiple economic stimulus packages have pumped trillions of dollars into the domestic economy and risen the money supply to unprecedented levels. Inflation for 2020 came in at 1.4%, with the current year heading in the same direction.
But now, inflation fears are picking up, and some wonder if the Fed’s money printing could come back to haunt the country in the form of rising inflation. For one, global food prices have been rising steadily with shortages around the world. Commodities like sunflower seeds, corn, and soybeans have all risen drastically in the past year. This means, U.S. consumers may have to get used to paying more for food in the coming years. Additionally, the proposed $15 federal minimum wage, if passed, could lead to price hikes across the board as corporations attempt to offload the added cost of employing workers to their customers. For these reasons, the St. Louis Federal Reserve has revised its estimate for market-based inflation higher from 1.6% in September to 2.2%.
On the flipside, there has been an increase in personal income thanks to another round of stimulus checks. With the end to the pandemic in sight, inflation has been able to be kept at bay. In fact, the Federal Reserve highlighted its desire to keep inflation below its 2% mandate in order to continue to facilitate economic growth in the country. Another round of stimulus payments directly to consumers will also help to keep consumer spending higher and savings intact.
Surprise economic growth in Turkey
Turkey is in the minority of nations’ whose economy actually expanded in 2020 amid the global pandemic. The country’s economy grew by 1.8% in 2020, with 5.9% growth in the fourth quarter alone. Outside of China, this made Turkey the best performing emerging market in the world. Turkey’s growth was seen in a variety of areas:
• Government spending increased by 6.6%.
• Gross fixed capital formation, a measure of business investment, grew by 10.3%.
• Household consumption rose by 8%, accounting for two-thirds of the country’s economy.
• Industrial output grew over the second half of the year.
Analysts estimate that Turkey’s economy could continue on its growth trajectory at an estimated 5.2% growth rate for 2021.
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For the Month Ending 2/28/2021 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
The U.S. Dollar paper currency
While paper money seems to be going the way of the dinosaur, let’s not forget about the medium with which the United States has used to conduct business for most of its history. The dollar was created on April 2, 1792 by U.S. Congress as a unit of money to be used across the country. Today’s dollar weighs 1 gram and measures 2.61 inches wide by 6.14 inches long. It’s comprised of 75% cotton and 25% linen, making it extremely flexible. In fact, a single dollar bill can be folded 8,000 times. That’s 20-times more than a normal sheet of paper. Printing paper currency can cost anywhere between 7.7 cents to 19.6 cents per note, depending on the denomination. It’s likely the government will actually save money as paper currency is less utilized.
Even if we don’t use it very much anymore, the U.S. dollar has been an important part of the United States of America, and we should thank it accordingly.
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.