The Market Today
Fed Expected to Wait on Policy Easing
by Craig Dismuke, Dudley Carter
Tracking Case Growth: The number of new cases each day has shown clear signs of plateauing in the U.S. While there remain hotspots, the broader trend is encouraging. The number of hospitalizations has turned lower over the past week and the rate of hospitalizations has not approached the April peak. The fatality rate continues to decline. The incoming data will remain important, but the faster moving trend is at least encouraging.
Monitoring the Virus Headlines: Virus cases in the U.S. slowed including in key states such as California and Florida. Discouragingly though, Florida reported a record for new hospitalizations and deaths. The bigger focus, however, remained on this afternoon’s Fed decision and signs that Congress could struggle to quickly close a bipartisan gap on plans for the next stimulus bill. Senate Majority Leader McConnell said a bill without liability protections won’t pass while Democratic leaders Schumer and Pelosi criticized the Republicans’ plan for coming up short on adequate support for the consumer. McConnell said negotiations were under way and would be led, for the GOP side, by Chief of Staff Meadows and Treasury Secretary Mnuchin.
FOMC Expected to Keep Policy Unchanged, For Now: We expect the FOMC to keep monetary policy unchanged this afternoon (1:00 p.m. CT). Economic conditions have improved since their last meeting, as seen in many of the Federal Reserve Scorecard variables (Chart of the Day), but the amount of lost activity and jobs to be recovered remains high. In addition, consumers and businesses are both likely to begin adjusting to a post-emergency-support environment in which the pace of economic recovery is likely to slow. Made worse by the re-acceleration of the virus in recent weeks, the weakening pace of recovery and volume of spare capacity remaining are likely to compel the Fed to ease policy. As such, we expect the Fed to adjust both their asset purchases and forward guidance in the near term. However, further easing could be more effectively accomplished with the support of new economic projections and the conclusion of the ongoing policy framework review. FOMC participants are scheduled to update their economic projections at their September meeting and appear in no hurry to complete their policy review. As such, we expect Fed officials to use today’s meeting to pave the path for policy adjustments at the September 16 FOMC meeting.
June Goods Trade Balance to Boost 2Q GDP Report: The June advanced goods trade balance report showed a surprising $4.7 billion decline in the monthly goods deficit, dropping from $75.3 to $70.6 billion. Exports actually rose 13.9% while imports increased 4.8%, both positive results in the wake of declining trade balances. The decline in the deficit points to a significant boost to an otherwise terrible 2Q GDP report, scheduled for release tomorrow.
Mortgage Applications Inch Down, Remain Positive: Mortgage applications for the week ending July 24 inched down 0.8% on a 1.5% decline in purchase apps and a 0.4% drop in refis. The average 30-year mortgage rate remained low at 3.20%. Overall, applications continue to point to an improving housing market.
Corporate Earnings Reports and Big Tech on Capitol Hill (Virtually): It is a another busy day for corporate earnings reports, with releases from GE, Boeing, and Paypal among many others. Focus, however, will be on Congressional testimony from the CEOs of Amazon, Google, Apple, and Facebook. In addition, all four companies will report earnings tomorrow.
Markets Take a Breather as Data and Earnings Disappointed Ahead of the Fed: Longer Treasury yields dropped steadily throughout the day even as equities recovered from early losses for most of the session. Equity futures had reversed lower overnight alongside stocks in Europe and fell further after earnings from 3M and McDonald’s disappointed expectations. Treasury yields turned lower with stocks and added to those declines after a disappointing consumer confidence report and solid auction of 7-year notes. Longer Treasury yields dropped to new intraday lows after the auction stopped through by 0.6 bps and primary dealers were awarded their smallest share of a sale in 2020. Lower yields were cemented by equities sharply reversing the early recovery in the final hour and sliding to close at new lows.
Stimulus Negotiations Likely to Be Contentious: The Fed extended emergency lending facilities that were set to expire on September 30th through the end of the year and is expected to keep its cautious tone at today’s meeting. However, Congress has yet to agree on a plan to prop up unemployed workers when the enhanced unemployment benefits expire on Friday. Comments from leaders of both parties on Tuesday signaled compromise on two wildly different stimulus bills, while still ultimately expected, won’t be a simple task. Gold recovered from an overnight decline to post its eighth consecutive gain to a new all-time high. Amid the flurry of developments, the S&P 500 fell 0.7%, the 5-year Treasury yield dipped 2.0 bps to a record low 0.264%, and the 10-year yield dropped 3.6 bps to 0.579%.
Mixed Markets Ahead of the Fed: U.S. assets had staged a bit of recovery overnight ahead of the Fed’s afternoon decision, with U.S. futures edging into positive territory and Treasury yields inching up after declining Tuesday. The modest moves are consistent with shifts in most other world equity and sovereign markets on Wednesday. The Fed’s latest policy decision will mark the halfway point of a busy week for corporate earnings and come amid contentious negotiations in Congress on another round of fiscal stimulus for a virus-wrecked U.S. economy. Past efforts from both the Fed and fiscal policymakers have helped prop up the markets and economy despite unemployment reaching levels not seen since the Great Depression.
Treasury Yields Erase Overnight Rise: The policy responses mirror actions taken around the globe, with more data overnight reinforcing the wide reach of the virus’s destructive impact. Australia reported the largest quarterly decline in consumer price inflation (CPI) on record and Hong Kong’s economy contracted again in the second quarter. With the spread of the virus in the U.S. picking up again in July and other countries struggling with signs of new outbreaks, a previously unflappable equity rally has stalled, the Dollar has weakened to a multi-year low, Gold has climbed to an historic high, and Treasury yields have moved back down to all-time lows. At 7:30 a.m. CT, S&P 500 futures were up 0.4% at a new session high while the 10-year yield had abruptly erased a small overnight increase to trade 0.5 bps lower at 0.574%.
Consumer Confidence Cools More Than Expected in July: The Conference Board’s Consumer Confidence Index cooled more than expected in July. The headline index dropped from 98.3 to 92.6, falling below the expected 95.0. Driving the pullback was a decline in expectations that overwhelmed an improvement in the current assessment and erased three months of brightening in the outlook. The small improvement in the current assessment, which has only made up 35 points of the 105-point drop from January to May, was the result of some further, marginal recovery in the labor market outlook, while softer expectations were reflected across all details. The backslide in confidence aligns with trends in other data, including new alternative data tracking consumer mobility, which points to the recovery slowing as the virus reaccelerated across the country.