This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions.
Economic optimism remains high in U.S. financial markets, buoyed by improving COVID-19 trends and solid economic data. The passage of the $1.9 trillion American Rescue Plan (ARP) added more fuel to the recovery, particularly in the near term, and the Fed seems committed to keeping a heavy foot on the accelerator for the foreseeable future. As such, there is a mainstream debate over inflation risks for the first time in many years.
One could argue the market is currently priced for an obstacle-free path of robust economic recovery, and another wave of COVID-19 cases could lead to another round of restrictions in parts of the United States, something Europe has been dealing with in recent weeks. That said, the broad economic outlook remains very positive looking forward, which fueled further steepening of the Treasury curve in March.
Although several economic measures softened relative to expectations in February, the general assumption was that unusually severe winter weather was the primary culprit for the downside surprises. With more normal March weather and another fiscal injection from the ARP, consumption appeared to resume to a pace well above average using credit card data as a guide. This optimism is evident in economist forecasts for 2021 real GDP growth.
Using the Bloomberg weighted average economist forecast (more recent forecasts receive higher weighting), expectations for quarter-over-quarter growth (annualized) through the third quarter are 4%, 9.6%, and 7.3%, compared with an average rate of 2.8% over the prior 50 years.
High economic optimism and more fiscal stimulus contributed to further curve steepening in the Treasury market in March.
Economist estimates for 2021 growth and consumption are well above long-run trends, and recent measures of restaurant activity and air travel suggest the most negatively impacted sectors of the pandemic are beginning to thaw.
Fed leaders continued to push back on inflation worries throughout March, and current market pricing for forward inflation is likely palatable for the Fed and its current objectives.
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