We are transitioning from “expectations” of a strong economic impact from the combinations of a high savings rate and pent up consumer demand to the incredible reality of just how powerful the rebound is. Given the significant rebound in retail sales, it makes sense that the Empire Manufacturing and Philly Fed Business Outlook crushed the consensus expectations. Impressive data considering that the U.S. economy is not fully reopened. Today’s results are the tip of the iceberg. The challenge for companies is rapidly shifting from survival to how to keep up with demand.
As we are learning from bank earnings, another key source of economic stimulus is coming from banks releasing significant reserves that had been set aside for losses that are no longer needed. This frees up substantial liquidity for banks and even pressures them to increase lending to more effectively utilize their balance sheets.
The key question is why yields aren’t moving higher, especially given inflation expectations based on the 10-year breakeven rate for TIPS is persistently over 2.3%. Concerns over international tensions, suspension of J&J vaccines and a looming 33% increase in corporate taxes appear to be overshadowing positive economic news. Look for relief from any of these issues to push yields higher.