Morning Notes — Decoupling

Increased fiscal stimulus expectations and vaccine optimism have been presented together in the recent bullish narrative, but these two themes will likely uncouple in the days ahead.  Encouraging JNJ Phase 3 data would greatly reduce the need for large-scale fiscal relief. Without an emergency, monetizing fiscal spending through central bank asset purchases will only sound like a dangerous policy experiment. Alternatively, discouraging vaccine data would likely increase the need for fiscal relief.  JNJ’s Q4 earnings report is due next Tuesday (1/26) before the open. The company’s single-dose vaccine readout is a key upcoming catalyst and efficacy in the 80% range would put the brakes on fiscal stimulus plans.  Both PFE/BNTX and MRNA released Phase 3 data on a Monday morning.  

Bond yields: You don’t need a vaccine-induced reopening and fiscal stimulus to get higher yields and more curve steepening.  Unprecedented levels of monetary accommodation, $3.546T in fiscal stimulus and +25.3% year-over-year money supply growth is more than enough fuel for a cyclical recovery. Increased spending from here with an assumed full reopening in Q3’21 could drive bond yields to problematic levels for equities. For now, that level is probably 10-year yields >1.45%.