What’s fueling the rise in U.S. interest rates?

On the latest edition of Market Week in Review, Director and Senior Investment Strategist Paul Eitelman and Research Analyst Brian Yadao discussed the increase in U.S. interest rates as well as U.S. retail sales from January. They also spoke about the market implications of a new report on the effectiveness of the Pfizer COVID-19 vaccine after a single dose.

U.S. 10-year Treasury yield reaches highest level of COVID-19 era

The most notable development in financial markets recently has been the rise in U.S. interest rates, Eitelman said, noting that the 10-year Treasury yield hit 1.33% on 19 February. “That’s the highest level in nearly a year,” he remarked, explaining that the upward movement is likely being propelled by two key factors.

The first of these is a sharper-than-anticipated reduction in the number of new COVID-19 infections in the U.S., the UK and to a lesser degree - continental Europe, Eitelman said. The decline in new cases has been a piece of positive fundamental news for the global economy, he noted.

The second, and arguably more important, factor pushing rates upward is an increase in expectations for a larger U.S. fiscal stimulus package, Eitelman said. “When President Joe Biden initially unveiled his fiscal stimulus plan on 14 January, the $1.9 trillion price tag seemed more like an aspirational figure. Now, one month later, it’s looking increasingly likely that it could become a reality,” he remarked.

The key reason why expectations have shifted toward a larger stimulus package is due to recent comments from a handful of centrist Democrats, such as Senator Joe Manchin of West Virginia, Eitelman said. In public remarks, Democrats like Manchin are no longer expressing disagreements over the size of Biden’s proposed bill, he explained. Rather, their issues of contention now revolve around smaller items in the bill, such as the proposal for a $15 federal minimum wage or the income threshold necessary for households to quality for $1,400 stimulus checks, Eitelman said.

“Because of this, expectations over the amount of fiscal stimulus have gravitated from a range of $600 billion to $1 trillion one month ago to a range of $1.5 to $1.9 trillion today-which is a substantial upgrade,” he noted.

Despite the rise in interest rates on the backs of these recent developments, there is no evidence that higher rates are having a detrimental impact on either the U.S. or global economy, Eitelman said. “For the time being, the world is in the good news is good news phase of the business cycle - and that’s been quite encouraging,” he remarked.

Did recent U.S. stimulus checks help power January’s rise in retail sales?

Speaking of good economic news, Eitelman noted that U.S. retail sales for January smashed consensus expectations, rising 5.3% from December. Economists had been predicting a 1.1% increase, he said, which was already seen as optimistic.

Digging into the data further shows that sales of consumer electronics, furniture and a number of big-ticket discretionary items were particularly strong during January, Eitelman noted. “This points to evidence that the $600 stimulus checks from December’s coronavirus relief bill flowed through into household bank accounts, and were spent in a fairly meaningful way that ultimately benefited the U.S. economy,” he stated.

This is especially encouraging news as expectations grow over another round of larger stimulus checks in March or April, Eitelman noted. “January’s retail sales numbers suggest that the U.S. economy could receive another meaningful boost in the second quarter if $1,400 stimulus checks are approved as part of the next COVID-19 relief package,” he remarked, adding that he believes fiscal stimulus measures have been a critical backbone to the economic recovery.

Will positive Pfizer vaccine news boost value and small cap stocks?

Turning to the latest COVID-19 vaccine developments, Eitelman characterised a recent report on the effectiveness of the Pfizer vaccine after a single dose as a major development. “The study from Israel found that one dose of the vaccine is 85% effective in preventing COVID-19-and this could really speed up vaccination efforts,” he noted.

Eitelman said that if countries are able to transition from a two-dose vaccine rollout strategy to a single-dose vaccine rollout strategy, the speed at which the Pfizer vaccine is administered to wider swaths of the population in developed countries could nearly double. This, in turn, would be a positive for financial markets-especially for more cyclical sectors of the market, such as value and small cap stocks, he noted.

Eitelman added that Pfizer also recently reported that its COVID-19 vaccine can now be safely stored in freezers commonly used by pharmacies, rather than in special ones requiring ultra-cold temperatures. This, he said, is a critical piece of news, especially for developing economies that don’t have the infrastructure to transport and store the vaccine at such extreme temperatures.

“Ultimately, this increases the potential for easier access to the Pfizer vaccine for both developing and emerging markets,” he concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.