Daily Market Color February 1, 2021Stocks Rally for Best Day in 10 Weeks Stocks rally for best day in 10 weeks Stocks had their biggest rally in 10 weeks led by retail and tech companies, with the S&P and DJA finishing up 1.61% and 0.76%, respectively. Meanwhile, Treasury yields and swap rates were little changed on the day, though the 10-year Treasury yield has continued to grind higher- rising ~1 basis point on the day to 1.08%. Volatility remained elevated despite the bounce back in risk assets- the VIX closing at an elevated reading of 30.24. U.S. manufacturing activity slows in January The ISM index of national factory activity fell to 58.7 in January, down from 60.5 in December. The lower activity reflected the increase in COVID infections, causing labor shortages in factories and their suppliers. A reading above 50 indicates an increase in manufacturing. While activity decreased, prices paid by factories for raw materials and other inputs jumped to its highest level in 10 years. Short-term interest rates hit their historical lows Benchmark rates like Fed Funds, LIBOR and SOFR and Treasury bill rates are near or at all-time lows as ample liquidity continues to drive down the cost of funds for financial institutions. The Treasury sold a remarkable $60B of two-year notes last week- pricing the issuance at an all-time low yield of 0.125%. 3-month LIBOR also hit a recent low- falling below 0.20% to 0.1955% today. Bank liquidity continues to rise Banks have continued to increase their deposits balances in 2021, building off the record levels seen in 2020. The rush to safety from depositers coupled with the large scale asset purchases by the Fed have made cash and reserves abundant for banks. In response, the Fed will discontinue its one-month term repo on February 9th to “sustain smooth functioning” of short-term U.S. dollar funding markets.
