The Market Today
Fed Keeps Policy Unchanged, Sees Growth and Inflation Boosts as Transitory
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
U.S. and EU Pandemics Continue to Diverge: The divergent pandemic situations in the U.S. and Europe, something Fed Chair Powell was asked about in his press conference, continued to be evident in Wednesday’s headlines. New Jersey increased capacity limits for restaurants and other businesses and the CDC said it was revisiting its guidance on travel and social distancing amid increasing vaccinations. In Europe, however, Greece reported the largest daily case increase since November, Poland said it will implement new restrictions from March 20 through April 9, and a spokesperson for the French government said new measures for certain localities would be announced later today. More broadly, the EU said it was considering implementing emergency measures to ensure it has sufficient vaccine supply as it continues to struggle with its roll-out.
24 HOURS OF MARKET ACTIVITY
Stocks Closed at Records and Yields Trimmed Gains as Fed Reiterated Commitment to Accommodation: The Dow and S&P 500 ended Wednesday at records and the Nasdaq came closer to a full recovery after the Fed reiterated its commitment to accommodation despite its forecast for a firmer recovery ahead. Stocks had slipped overnight and into morning U.S. trading as the Treasury curve moved higher and steeper ahead of the Fed’s decision. Speculation had grown that the Fed might project a rate increase in 2023 amid an improving pandemic and after a larger-than-expected stimulus package passed through Congress. The Fed did brighten its outlook for growth this year and the labor market moving forward and some dots did drift higher. However, the median rate forecast was unchanged through 2023 on expectations inflation will remain tame (more below). Stocks jumped into positive territory and Treasury yields pulled lower with the Dollar. Stocks added to gains during the press conference in which Chair Powell did little to push back on the dovishness of it all. Ultimately, the S&P 500 added 0.3%, the Dow gained 0.6%, and the Nasdaq rose 0.4%. After rising as high as 1.69% ahead of the decision, a high since January 2020, the 10-year yield ended the day up 2.5 bps to 1.64%. The 3-year and 5-year yields fell more than 3 bps to 0.30% and 0.80%, respectively. The 2-year yield slipped 1.6 bps to 0.133% after climbing to 0.16% earlier. Fed funds futures were little changed, with the market still pricing in nearly a 100% chance of a rate hike in 2023.
Follow Through on Fed’s Dovishness Reignites Longer Yields Upward Momentum: The benign upward pressure on longer yields in the initial hours after the Fed’s decision intensified overnight, with investors responding to officials reiterating a high level of comfort around letting economic momentum build until actual above-target inflation appears. The 30-year yield was up 6.7 bps at 7 a.m. CT to 2.49%, its highest reading since July 2019, as the 10-year yield rose 8.7 bps to 1.73%, a new high back to January 2020. With the two-year yield still mostly locked in by the Fed’s persistent dovishness, up just 1.0 bp to 0.14%, the spread between the two jumped to more than 158 bps, the steepest curve since July 2015. Equities were under pressure ahead of the jobless claims, as the Nasdaq dropped 1.6% and the Dow and S&P 500 pulled back from record levels. Globally, the market trends were consistent. U.K. yields were leading the rise in Europe after the Bank of England, in an otherwise unexciting but dovish decision, echoed the Fed’s sentiment of wanting to see “clear evidence” inflation pressures are building.
Fed Keeps Policy Unchanged, Sees Growth and Inflation Boosts as Transitory: As expected, the FOMC unanimously voted to keep its policy rates unchanged but reflected the recent improvement in activity and a stronger outlook in the Official Statement and updated projections. The Statement said activity has “turned up” after moderating earlier in the year but reiterated the Fed’s forward guidance on interest rates and asset purchases. The updated projections, however, were revised to reflect the changed dynamics since December, when the pandemic was at its worst and Congress was debating a smaller stimulus package. The current year’s growth forecast was revised from 4.2% to 6.5%, which Chair Powell credited to the recent stimulus agreements and increasing vaccination efforts, and unemployment is expected to end 2021 at 4.5%, compared with December’s forecast of 5.0%. Core PCE inflation is expected to average 2.2% in the fourth quarter, stronger than the previous projection of 1.8%.
However, much of this year’s effects are expected to be transitory. Economic growth in 2022 was nudged up just 0.1% to 3.3% while 2023 was actually revised down from 2.4% to 2.2%. Although the unemployment rate is expected to be at 3.5% at the end of 2023, down from 3.7% in the last set of projections, inflation is expected to fall back to 2.1%. As a result, the median rate forecast continued to show no rate hikes through 2023. More broadly, seven participants expect at least one hike by the end of 2023 but Fed Chair Powell said he wouldn’t place too much weight on a forecast that far out in the future. Bottom Line: While the overall outcome of the policy decision was dovish, it will only take three more participants to move their 2023 dots higher to move the median outlook to a rate hike. If the pandemic continues its positive trend over the summer, it appears such a shift could occur as early as the Fed’s June 16 Meeting.
Jobless Claims Data Disappoint, Volatility in State-level Results Continues: Initial jobless claims for the week ending March 13 rose 45k to 770k, partly on increases of 17k in Illinois and 21k in Texas. On a positive note, initial PUA claims fell 197k to 282k, led by a 217k decline in Ohio. There may have been uncertainty during the reference week regarding the expiration of the program. In passing the most recent stimulus package, the program has now been extended.
Continuing jobless claims fell 18k for the week ending March 6 fell a disappointing 18k to 4.124 million. Continuing PUA claims for the week ending February 27 fell 773k but the decline was the result of volatility in California’s reporting once again. California reported a decline of 808k continuing PUA claims. Likewise, continuing PEUC claims fell 641k for the week and California, alone, reported a decline of 781k. Other states with notably volatile results in this week’s reports were Texas, Massachusetts, and Michigan.
Regional Fed Reports on Fire: The Philadelphia Fed’s regional report on manufacturing activity jumped 28.7 points in March to its highest level, 51.8, since 1973. The underlying details of the report were very strong, led by a 27.5 point increase in the new orders index to 50.9. The employment, average workweek, and shipment indices were all encouraging.
Powell Speaks Again: In case Fed Chair Powell left any uncertainty as to his laissez-faire perspective on inflation at yesterday’s press conference, he will have another chance to make public comments today, speaking at a BIS conference at 10:55 a.m. CT.