The Market Today
Fed Chair Powell: Significant Economic Risks, Negative Rates Not on the Table Now
by Craig Dismuke, Dudley Carter
Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT
Monitoring the Covid Stimulus Headlines: Markets were almost entirely focused on Fed Chair Powell’s Wednesday webcast (more below) in which he stressed the need for more fiscal spending in the U.S but shunned negative rates. Later, President Trump said he’s a “believer in negative rates.” Fannie Mae and Freddie Mac announced payment deferral options for consumers affected by virus. In Europe, Italy’s PM announced a 55 billion Euro stimulus package that includes payments to Italians, tax cuts, and grants to small and medium-sized businesses. EU members have yet to agree on bloc-wide recovery approach, but the European Commission’s president said her “ambitious” plan “will include grants” to countries. The ECB’s chief economist expects virus-related economic disruptions into next year and potentially into 2022. After the U.K.’s sharpest monthly contraction in records back to 1997, Governor Bailey said the Bank of England stands ready to finance the government’s spending efforts.
Monitoring the Covid Re-Opening Headlines: Abroad, Singapore announced a six-step plan that businesses need to follow to open up. South Africa said it was preparing to further ease restrictions in certain areas. Chile expanded its quarantine to more areas after a spike in new cases. In the U.S., Washington D.C. extended its stay-at-home order until June 8. New York has more counties that qualify to re-open. New Jersey said it will allow construction activity to restart and retail to open for curbside pick-up on May 18. On a less positive note, New Jersey expects April’s revenue to be down 60% from a year ago and said it had identified cases of the inflammatory disease potentially related to COVID in 18 children. President Trump said he disagreed with Dr. Fauci on keeping schools closed and said they should “absolutely” be opened. Wisconsin’s supreme court ruled against the governor extending the state’s stay-at-home order and Maryland said it will enter phase one of re-opening on Friday.
36.5 Million Unemployed Claims in Eight Weeks: Initial Jobless Claims Remain High: Initial jobless claims for the week ending May 9 did not pull back as much as expected with another 2.98 million persons filing for unemployment benefits, down from 3.18 million in the previous week. After seeing 6.87 million persons file for unemployment in the final week of March, the weekly tally of new filers has declined each week. However, the weekly tally has remained well above the pre-covid record high of 695k. Through eight weeks of elevated jobless claims, there have now cumulatively been 36.5 million persons apply for benefits, 24% of the 152.5 million workers on nonfarm payrolls before the outbreak.
Continuing Claims Seem Too Good to Be True: Continuing jobless claims for the previous reference week only increased 456k (exp. +2.5 mm) despite a 3.2 million increase in new claimants that week. This gives the impression that 2.7 million previously unemployed persons returned to work during the week ending May 2. This would be a very positive development for economic activity. There is, however, speculation that the lower tally reflects a bottleneck in the claims process. The BLS did not address the surprising figure in their statement.
Fedspeak: Kashkari (Minneapolis – V), Bostic (Atlanta – NV), and Kaplan (Dallas – V) are all scheduled to speak today but each has previously weighed in this week.
Powell Pulled Equities Lower with Worrisome Outlook for the Recovery: Equities tumbled Wednesday as Fed Chair Powell warned about a slow and uncertain recovery that may require more stimulus to prevent the historic contraction from creating long-lasting problems for the economy (more below). Reversing overnight strength in futures trading that had run against the global grain, the major U.S. indexes slid at the opening bell which rang just as Powell’s webcast wrapped up. The drop deepened mid-morning with the indexes consolidating in the afternoon to close near the lows of the day. The Dow slumped 2.2% while the S&P 500 fell 1.8%. Energy companies fell more than 4% to lead all 11 sectors lower with financials close behind.
Treasury Yields Closed off the Lows, But Curve Flattening Continued: The indexes have declined sharply over the last two sessions following two high-profile professionals cautioning about the outlook. Before Powell’s Wednesday webcast, Dr. Fauci warned a group of Senators on Tuesday that reopening too soon risks a second outbreak that could result in further health and economic setbacks. Although equities closed near their lows, Treasury yields pushed up from theirs to end mixed on the day. The 2-year yield was unchanged at 0.16% while the 10-year yield dipped 2.3 bps to 0.65%. After the final refunding auction of the week saw steady demand for 30-year Treasurys, the Long Bond dropped 2.5 bps to 1.35%.
Powell’s Grim Outlook Weighs Globally: Global equities fell sharply overnight following yesterday’s declines on Wall Street after Fed Chair Powell warned about the “significant downside risks” to the outlook and the possibility of a slower-than-desired recovery (more below). Combining Powell’s gloomy assessment with Dr. Fauci’s Tuesday warning of re-opening too early and an uptick in cases in South Korea over the weekend, investors’ hopes for a quick return to more normalized activity have been dented this week. The MSCI Asia-Pacific Index closed down 1.4% with Australia’s ASX 200 among the worst performers. Similar to last Friday’s U.S. jobs report, Australia posted a record drop in employment for April that lifted unemployment by less than expected because of a labor force exodus.
Treasury Yields Continue to Flatten Lower Before Jobless Claims: Europe’s Stoxx 600 was down more than 2% and at its session low just after 7 a.m. CT. Ahead of the latest weekly jobless claims results, S&P 500 futures had edged 0.5% lower and the flattening of the Treasury curve on lower yields persisted. The 2-year yield remained steady around 0.16% while the 10-year yield dipped 3.2 bps to 0.62%. After actual claims exceeded estimates, stock futures moved lower and the 10-year yield fell to down 4.4 bps on the day.
Powell Says Economy May Need More Help: Fed Chair Powell struck a disconcerting tone as he delved into a discussion of the risks to the medium-term outlook. “The scope and speed of this downturn are without modern precedent,” Powell said, as has been the response from governments and central bankers. However, the actions taken to date “may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.” “There is a growing sense that the recovery may come more slowly than we would like,” Powell added. Policy makers, particularly fiscal policy makers, must remain nimble and willing to do more to prevent a “deeper and longer” recession, which history shows “can leave behind lasting damage to the productive capacity of the economy.”
Powell Quashed Negative Rate Policy in Q&A: Addressing the recent rise in market expectations for a negative Fed Funds rate by 2021, Powell said, “The committee’s view on negative rates really has not changed. This is not something that we’re looking at. …We think we have a good toolkit, and that’s the one we’ll be using.” He pointed back to the October 2019 meeting minutes which showed that “all participants” agreed that negative rates did not appear to be a useful tool in the U.S. Expounding on the topic, negative rates have a mixed tracked record where implemented, Powell noted, and pose risks to bank profitability and credit intermediation.