The Market Today
China Cuts Key Rates, New Virus Cases Drop with Another Protocol Tweak; U.S. Data Remain Solid
by Craig Dismuke, Dudley Carter
Solid U.S. Economic Data to Start: This morning’s economic data was solid with the Philadelphia Fed Business Outlook surging unexpectedly and jobless claims matching estimates at a low level.
Philly Fed Index Surges Unexpectedly: The Philadelphia Fed’s Business Outlook Index jumped nearly 20 points in February to 36.7, its highest level since early 2017 and one of the firmest readings over the last several decades. Economists had expected the index would drop from 17.0 to 11.0. In the details of the report, solid increases in current and expected new orders led widespread gains across most components. Current employment, however, cooled to one of its weaker readings in more than three years and indications of future hiring held near the bottom of its three-year range. Inflation indications remained subdued.
Initial Jobless Claims Remain Low: The update on initial jobless claims showed a small increase in new filings, from 206k to 210k during the week ended February 15. The four-week average fell more than 3k to 209k, the lowest level since April and one of its healthiest readings since the late 1960s. Continuing claims ticked up modestly. The initial jobless claims series continues to reflect a resilient labor market.
Later Today: At 9 a.m. CT, the Conference Board will release its leading index for January which is expected to show a rebound into positive territory. Just after lunch, Richmond Fed President Barkin (non-voter) will make remarks at Harvard.
Stocks Reached Records as Optimism Returned: The S&P 500 and Nasdaq closed at new records Wednesday on additional signs COVID-19 is spreading at a slower rate and after the Fed’s January Minutes (more below) showed officials are in no hurry to even consider a case for raising rates. The S&P 500 rose 0.5% on greater-than-1% gains for energy and technology companies. Crude prices climbed back more than 2% amid a recovery in global optimism. Shares of Apple came close to recouping all of Tuesday’s decline that was tied to a revenue warning for the current quarter. The equity rebound combined with solid housing starts and permits and firmer producer price inflation to nudge Treasury yields higher by the close. The 2-year yield rose 1.0 bp to 1.42% while the 10-year yield added 0.5 bps to 1.57%. The Fed’s Minutes had little discernible impact on stocks or bonds.
Uncertainty Lingered Elsewhere: Despite some signs of optimism returning, numerous signs of uncertainty remained. While yields rose, the 3-month T-bill rate closed above the 10-year bond yield for a second session. Gold prices rose again, resetting yesterday’s seven-year record high. The Dollar continued higher amid the growth worries, reflecting expectations for the U.S. to outperform in the uncertain environment. The Euro has tumbled mightily during the coronavirus outbreak to the weakest Dollar comparison since April 2017, on fears the disruption could ruin early signs of stability in the region. The Japanese yen, historically a beneficiary of uncertainty, weakened to an eight-month low on growing recession worries. The Japanese economy contracted sharply at the end of the year and weak data since has fueled fears the virus interruption could tip it into a recession.
Virus Cases Slow on Another Protocol Tweak as China Cuts Key Interest Rates: Global equities are mixed overnight and other asset classes are sending mixed messages about investors’ risk appetite. Chinese stocks rallied sharply as the number of new virus cases continued to slow and the country’s central bank cut key lending rates. China reported fewer than 400 new confirmed cases on Thursday, although the National Health Commission appeared to revert back to the previous protocol requiring a positive test for confirmation. Alongside fewer cases, China’s central bank announced it was lowering its one-year loan prime rate from 4.15% to 4.05% and the five-year rate from 4.80% to 4.75%. The rate reductions are the latest entries on a list of measures China has taken in an attempt to absorb the shock from a virus-induced economic standstill.
Mixed Signals Continue Across Asset Classes: China’s CSI 300 rallied 2.3% during a mixed Asian session that has given way to mostly weaker trading results across Europe and in U.S. futures. Elsewhere, the Dollar continued its climb against the Euro (strongest since April 2017) and the Japanese Yen (strongest since April 2019). In the same vein, gold prices rose for a fourth day to a new seven-year-high. Despite those hints of a risk-off tone, crude prices rose again amid supply pressures and have failed to post a decline over the last seven sessions. Prior to the this morning’s U.S. data, Treasury yields had declined amid a move lower in global yields. The 2-year yield was 1.8 bps lower at 1.40% while the 10-year yield had edged back 2.5 bps to 1.54%.
Fed’s January Minutes Show Cautious Officials Were Comfortable Buying Time: The Minutes from the Fed’s January meeting echoed signals from the Statement and Chair Powell’s press conference, that the stance of monetary policy is appropriate in the current economic context and adequate to buy officials more time before deciding what to do next. Most expected household spending will pick up after some moderation because of a healthy labor market, and were “cautiously optimistic” that business spending could get a lift from easing trade tensions and some signs of global stability. Overall, the risk balance was described as “somewhat more favorable” than in December, despite “a number of downside risks [which] remained prominent.” However, the subsequent spreading of the coronavirus to more than 70,000 could render this sentiment stale; there were fewer than 5,000 infected at the time of the meeting. Against an unchanged inflation outlook, “participants viewed the current stance of policy as likely to remain appropriate for a time” absent developments that “led to a material reassessment of the outlook,” allowing “for a fuller assessment” of the effects of prior rate cuts and giving the Fed time to “accumulate further information bearing on the economic outlook.”
Away from the Outlook: A considerable amount of ink was spent away from the current outlook, describing discussion about the ongoing framework review and the ultimate plans for the recent return to balance sheet expansion. The discussion around the policy review focused on implications of monetary policy on financial stability risks and the potential use of inflation ranges. After heavy debate around the impact of low rates on financial stability, there were split opinions on the actual effect but a consensus that non-monetary policy tools were more adequate for addressing such concerns. The discussion of inflation ranges centered on three specific range types, including the pros and cons of each and difficulties in explaining any change to the public. The related “deliberations” will continue at upcoming meetings and a final decision is still expected sometime this summer. On the balance sheet, officials signaled support for continuing temporary operations through the April tax season to avoid another tax-related reserve scare similar to last September. After April, the Fed believes durable reserve levels will be adequate to allow for temporary operations to be phased out and reserve management bill purchases to be slowed. The idea of a standing repo facility continues to be discussed.
Fed Unsure About Virus Effects: The Fed’s January Minutes, describing discussions held when the coronavirus had infected fewer than 5,000 people, described the virus as “a new risk” to the outlook. Even with the illness spreading now to more than 75,000, more recent Fed commentary continues to signal officials remain in wait-and-see mode. Dallas Fed President Kaplan (voter) said “it’s too soon to be able” tell how the economy will respond after an expected virus disruption in the first quarter. President Kashkari from Minneapolis (voter) doubts the U.S. will be unscathed by the virus’s effects and noted it adds to uncertainty accompanying the outlook. Cleveland Fed President Mester (voter) noted that it’s still too difficult to definitively say what the impact of the illness will be on the global economy. Atlanta President Bostic said COVID-19 has made forecasting very difficult.
Kashkari’s “Guess” Is Next Move Will Be a Cut: Away from the virus chatter, the four Fed officials sounded generally sanguine about the outlook. Kashkari stood out as the most concerned, pointing to “any number of shocks around the global economy that could hit the U.S. economy.” He’s “comfortable [with] where rates are,” and said “I’d guess we are probably going to sit here for the next three months, next six months or maybe longer.” However, “if I were to guess what the next move will be, my best guess is the next move would be down rather than up,” Kashkari said.