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As the benchmark Treasury yield traded at its highest level in nearly a year, Summit Place Financial Advisors President Liz Miller tells Reuters' Fred Katayama a further steepening in rates could slow the hot housing market and impact the economy.
FRED KATAYAMA: The NASDAQ dropping Wednesday as investors rotate away from tech stocks towards cyclicals, helping lift the Dow. The Fed just out with minutes of its last meeting, let's get a read from Liz Miller, president of Summit Place Financial Advisors. Good afternoon and welcome back, Liz.
LIZ MILLER: Hi, Fred.
FRED KATAYAMA: So the big headlines I see, the economic conditions the Feds saying are far from longer term goals, of course, which includes that 2% inflation target. They're saying they anticipate inflation moving up over time. What are your key takeaways from the minutes?
LIZ MILLER: Well, in many ways, these minutes need to be understood in the context of looking backwards just a little bit. Because the last stimulus check had not quite gone out. And we were in a seasonal spike after Thanksgiving into December of COVID. So we definitely had softening economic data that they were considering at that meeting. And that's what we're seeing in the minutes here.
They always try with their crystal ball to look forward. Now that we're sitting here later and can look backwards, we see COVID cases were going down and then today that very strong retail number off of that stimulus package. So what I see out of the notes is not surprising. But it was a very middle of the road confirmation of the data at the time and the path that they continually say they want to continue out for the next 12 to 18 months.
FRED KATAYAMA: So is there anything that you saw in the minutes that would change your views on inflation or rate policy?
LIZ MILLER: No, I don't think anything would change my views. They gave a bit of a nod to that there might be some inflationary pressures going forward. But we've heard time and time again they're going to let inflation move a little higher. More interesting today is this 20 year auction that we had this morning that really went at surprisingly high rates, over 1.9%.
Didn't seem to be a lot of appetite for that Treasury auction and then a real surprise at the rate. And is that nominal rate showing us kind of some short-term inflation concerns?
FRED KATAYAMA: And there's a lot of concern in the markets with the 10 year Treasury bond going as high as 1.33% in yield. At what point would a further rise in yields-- is there a level that would throw cold water on this equity market rally?
LIZ MILLER: Certainly, there's a level. I'm not sure what it will be. But I think what more naturally is going to happen is we've seen a lot of strength from the consumer, not just in that retail sales number this morning, but we know in the housing market very low mortgage rates, a lot of demand for housing, for refinancing. If that 10 year starts creeping up, which really is the peg for most mortgages and refinancing, we're going to see that slowdown in the housing market.
And I think that that really could put a little bit of a drag on the strength of this economy right now.
FRED KATAYAMA: All right. So watch housing. That retail sales figure you cited earlier in January, 5.3% increase, five-- nearly five times what economists had been expecting. A good sign I guess for the economy, but is there a concern on the bond side in terms of what that might mean for inflation?
LIZ MILLER: I think we've seen an immediate response on the bond side. But I think we need to sit with this data point a little bit longer. We came off of soft retail sales, surprisingly soft in January. To me, what this really says to us is that consumers were very willing to spend the latest stimulus check. And that's actually important. Because as we look back over 2020, a pretty high percentage of the previous stimulus checks was kept in savings.
And so, as we like to say, there was a lot of dry powder to be reinvested in this economy. And that may be what we're seeing in the number this morning. That not only was it the current check but increased confidence now that we do have a vaccine rolling out, now that we are seeing cases go down, that this wasn't just the latest stimulus check but some pent up savings and the demand from it being rolled out into our economy.
FRED KATAYAMA: And Liz, do you sense a turning point in this equity market rally? A lot of people, some big market watchers have pointed out, you know, the SPACs, the IPOs, Bitcoin, among other things, and, well, all of the Reddit trade. On the other hand, we also have concerns about inflation rising this week.
LIZ MILLER: When I look at the broader market, what I really see is this bifurcation of that technology strength that came out of 2020 really going sideways since the beginning of the year. I think last time we talked I told you I thought that would be very healthy. I thought that sector needed to grow into its valuations. Even as we look at the market today then, we see that strength in some of the beaten up cyclicals, I would say, where, once this economy gets moving, there's a lot of upside to the valuation for these companies.
So it's a barbell market. Part of the market looks very healthy to me and going through what we would want and we expect at the beginning of this year. And then we've got a market that's being buffeted by this very high risk on speculative trading.
FRED KATAYAMA: And lastly, little time left but so given the current state of the market, what sectors are you favoring now that you think it's OK to buy into at this level?
LIZ MILLER: Well we've been buying from the fall into the winter into the industrial sectors, into some of the hospitality, as I said areas that really certainly were hurt by COVID, weren't doing anything. But now we might see a little bit of light on the horizon. We also are filling out some of our tech positions for clients that didn't have full positions. As these stocks are just going sideways, I think it is an opportunity to fill out positions, as long as you have a long-term investment horizon.
FRED KATAYAMA: And we're getting the read on the travel sector this week I guess with Hilton out today and Hyatt after the bell. Thanks a lot Liz for your thoughts.
LIZ MILLER: Thank you.
FRED KATAYAMA: Our thanks to Liz Miller of Summit Place Financial Advisors. I'm Fred Katayama in New York. This is Reuters.