Tech stocks rebound as treasury yields retreat

Yahoo Finance’s Emily McCormick and Brian Cheung discuss today’s market action with Greg Staples, Head of Fixed Income, Americas at DWS Group.

Video Transcript

EMILY MCCORMICK: We want to stick on this topic and bring in Greg Staples. He is with DWS Group, Head of Fixed Income. And, Greg, just want to get your take, too, on what we're seeing in the treasury market. Of course, the 10-year benchmark, 10-year yield, pulling back a bit today. And I'm wondering, now that the market has had a couple of days to digest the Powell presser that we had last week, where do you think things stand now? And do we have more room to run here when it comes to fixed income and Treasury yields?

GREG STAPLES: Sure. I mean, we've actually seen about an 80 basis point rise in rates since the beginning of the year, almost 100 basis points since last September. I think we've got a chance for a pause here. We've got a couple of weeks to perhaps digest, but we have to remember what's going to happen next is there's going to be a discussion of the stimulus program.

I mean, we just-- the ink is hardly dry on the $1.9 trillion stimulus program, but now we're talking about infrastructure, which is coming down the pike next. That could be anywhere from $2 to $3 trillion. So I think the market is going to digest a little bit. It's going to look to see what happens to the stimulus checks, if they're going to get spent, if they're going to get saved, if they're going to be put into the equity markets to the month of April.

We'll look at the COVID data and see if we get a continued decline in transmission rates, a continued decline in mortality. And we'll see if we can get just a reopening, people start going to restaurants again, et cetera, which then would mean a bid up for labor markets because you need new waitress-- waiters and waitresses, new hotel workers, et cetera. And so we're looking at April potentially for a sharp decline in unemployment. That potentially altogether would probably drive the next leg either up in rates or perhaps even down. We'll just have to wait and see.

BRIAN CHEUNG: Now, Greg, at the same time, it seems like, you know, investors still have that institutional memory of what was happening two or three weeks ago when the bond market action had a lot of people wondering if a stock market correction was overdue. And, since that point in time, it seems like, you know, the story is back on line when it comes to taking on risk. Is there still the concern that volatility is hiding in this market and that, whether it's the Fed or some sort of fiscal policy trigger, that there could be some correction overdue for what many people consider to be still high valuation?

GREG STAPLES: It's a very, very good question. And I think people look at real rates again. It's the rate that you get in Treasury inflation-protected securities because that's the number that you're really watching in the marketplace.

And a lot of people thought, when we got through a minus 75 basis points, which was actually only about two or three weeks ago, that that might be a trigger point to contract PEs and perhaps cause a little bit of a pullback in the equity markets. We're now at about 0.6. We've gone through that.

We seem to be holding our own, but it is interesting to note, some of those tech stocks have pulled back a little bit. Some of the growth stocks, some of the small caps have pulled back a little bit. So there is some sensitivity there. It just hasn't gotten to the point where you're talking about a full-fledged correction. Does the next 10 or 15 basis points do it? Potentially. We'll just have to wait and see.

EMILY MCCORMICK: And Greg, when we look at what the Fed has actually said in terms of keeping rates on hold likely through 2023, it seems like the next thing to really look for here for markets is going to be when tapering actually kicks in. And I'm wondering what benchmarks you're really watching or that investors should be watching to gauge when that tapering might take effect, when that substantial further progress has been met in the Fed's eyes, and when we could get a Fed move when it comes to QE.

GREG STAPLES: Well, you know, it's funny because Powell has done an extremely good job of sticking to his message. You referenced his press conference last week, and he is very, very solidly on message. They're looking for a 4.5% unemployment rate by year end.

Now, we're-- now we're roughly around 6.2%. And they're looking for, per your flexible inflation targeting, a 2.5% rate consistently. That means probably over six months consistently. And it's only then, when you get those two together, that you're actually going to be talking about potential tapering, potential hiking.

Our best guess is it probably happens in the fourth quarter, but you're really going to have to see some pretty solid data before then. It's going to be data driven. It's going to be flexible. Powell is not going to get pushed around by the bond market. He's really going to have to wait and see.

And I think, if you're talking about real time before then, obviously, every Thursday morning when that jobless claims number comes in, first Friday of every month when you see the new jobs number come in and the unemployment rate kick in-- and you referenced PCE. That's the Fed's most important view of inflation. And we're going to get the read for the last month this coming week.

So you're going to watch inflation. You're going to watch claims. And you're going to watch the unemployment rate. And I think that's what's really going to drive things.

BRIAN CHEUNG: Well, let's talk a little bit more about inflation. Now, in the February numbers, we're not going to start to see some of those base effects that could really put some eye-popping numbers in there, but the Federal Reserve notably raised its expectations for core personal consumption expenditures in the last round of dot plots that we got Wednesday. They now see us hitting core PCE of 2.2% this year, whereas, in December, they only saw 1.8% this year. So, if we know that the first trigger for the beginning of the thought process to raise rates is going to be hitting 2%, do you think markets will get jittery, despite the Fed trying to talk that down saying it's going to be transitory?

GREG STAPLES: I think-- you're absolutely right by the way. You bring up the point that you're looking at year-over-year baseline effects because we're going to start comparing against the spring of 2020, very depressed prices, as COVID really first had its impact upon the marketplace. So, the next two months or so, you're going to see some high print numbers in the year-over-year basis.

Powell seems convinced, as we get into the third quarter, it's going to be little more suppressed, that things are going to be under control. Now, you recall, he's saying we're probably talking about six consecutive months of inflation running even north of 2%. 2% is probably necessary, but not sufficient. I think he's going to want to see maybe even 2 and 1/2%.

And I think the only thing that would spook the markets is if you saw-- and, again, past these baseline effects, if, in July or August, you saw something as high as a 3%, then there's going to be a potential that things are getting a little bit out of hand. And it might accelerate the need for some more tight monetary reaction from Powell. But I think it's a ways to go before we get there.

EMILY MCCORMICK: And Greg, what do you make of the increased projections that we actually saw for the economy, especially in 2021 on GDP, out of the Federal Reserve? Do you think those could still be too conservative? Or do you think they're about where they should be, considering where things stand now with the recovery?

GREG STAPLES: Boy, you know, depending on who you talk to on Wall Street or if you talk to all economists, they're pretty much all over the map. I think everybody has been updating their forecasts. I've seen anywhere from 5 and 1/2% on the low side to 7% or 8% on the high side.

I think, you know, we're going to be somewhere within that range, but so much of it is dependent upon how the stimulus is getting spent. And it really is just within the past couple of weeks that that stimulus was inked into law. So we've got to see how the effects of that are, again, whether people spend that or whether people save that.

But I think it's going to be a really robust 2021. I think it's going to be strong growth. And I think probably most people have done their adjustments in terms of their expectations going forward. Anything after this is probably going to just be fine tuning. It's going to be a good year.

BRIAN CHEUNG: All right, Greg Staples, Americas at DWS Group Head of Fixed Income, thanks for joining us this afternoon.