The Market Today

Fed Literally Keeps NIRP Off the Table in April Minutes

by Craig Dismuke, Dudley Carter


Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT

Monitoring the Headline – Relatively Slow Day of Virus News: Airline stocks were among the top performers Wednesday. Delta said it could add up to 500 flights across June and July in response to increased demand and allow for in-flight social distancing. United’s CEO said he’s a little more optimistic each day about a pick-up in travel. Similar sentiment has been relayed by Southwest and American in recent days. Japan is lifting restrictions in Osaka, Iowa will re-open bars next week, and Illinois’s governor said his state is on pace to enter phase three by the end of the month. Italy’s three-day average for new cases fell to the lowest since March 5, New York reported fewer than 2,000 new cases for a fourth day, and Governor Cuomo said there has been no uptick in metrics for re-opened parts of the state. Speaker Pelosi described the $3 trillion House bill as “lean” and targeted and said an infrastructure bill could be announced soon.


Philly Fed Index Still Weak, but Less Bad: The Philadelphia Fed Business index rebounded less than expected in May, up from -56.6 to -43.1, but the headline index was once again misleading. Most underlying metrics were significantly less bad in May: the new orders index jumped from -70.9 to -25.7, the number of employees index increased from -46.7 to -15.3, and the average workweek index improved from -54.4 to -7.1.  In an unusual twist, the sub-index that was keeping the headline index inflated, the delay in delivery times, finally dropped more in-line with the economic weakness that exists.  As a result, the headline index did not improve as much as the other sub-indices indicate it could have in the May report.

Jobless Claims  Remain High, Continuing Claims Show No Sign of Re-Employment: Initial jobless claims for the week ending May 16 dropped 240k to 2.44 million.  This marks the seventh consecutive weekly decline, but the ninth consecutive historically high report.  Total new claims are now up to 38.9 million over that period.  Eventually the focus will turn to continuing claims as an indicator of unemployed persons being able to re-enter the labor market.  For now, after rising from 22.5 million to 25.1 million for the week ending May 9, the data do not show evidence of a big shift.  However, there also remain some data anomalies beneath the headline. Continuing claims in California fell 1.9 million in the previous report but increased 737k in the May 9 data (non-seasonally adjusted).  In Florida, continuing claims were up 574k two weeks ago followed by a 1.1 million increase in the latest data (also non-seasonally adjusted).  It appears the states could be working through the backlog of filings.  Either way, there is no solid evidence of improvement at this point.

Markit PMIs, Leading Index, Existing Home Sales: At 8:45 a.m. CT, the May preliminary Markit PMIs  are expected to show more, early evidence of a resumption in activity (not yet rising to the level of “recovering” activity).  At 9:00 a.m., the Leading Index for April is expected to show further deterioration in activity.  At 9:00 a.m., the April existing home sales report is expected to show a 20% drop in activity, although faster housing data have shown some improvement recently.

Fedspeak: Speaking from the Fed today will be New York Bank President Williams (9:00 a.m. CT), Fed Vice Chair Clarida (12:00 p.m.), and Fed Chair Powell (1:30 p.m.).  Williams’s comments could be most interesting given that we have not heard as much from him recently.


S&P 500 Recovered to Ten-Week High: U.S. stocks recovered all of Tuesday’s losses despite the Fed’s April Minutes reinforcing more recent comments from monetary officials that the economy faces considerable risks and a long and gradual recovery. The 1.7% gain for the S&P 500 left the index at its highest level since March 6. Investors have chosen recently to see through ubiquitous signs of ongoing economic destruction, instead focusing on the gradual re-opening of the U.S. and global economies and pledges from policy makers to continue with their unprecedented support. Energy companies led all eleven sectors higher as U.S. WTI rose 4.8% after the EIA reported a second weekly drawdown of crude inventories.

Yields Fell Back After Solid 20-Year Auction: Yields were already lower before the Fed’s Minutes were released after the first auction of 20-year Treasury bonds since 1986 was well-received by the markets. The $20 billion offering priced at 1.22% with a bid-to-cover ratio of 2.53 that split the demand metrics for last week’s auctions of 10-year and 30-year Treasurys. The entire Treasury curve reached new lows after the auction results were posted before inching back up with equities into the close. Maturities inside of 30 years were changed by less than 1 bp on the day with the 2-year yield closing at 0.16% with the 10-year yield finishing at 0.68%.


Markets Reverse Again As Caution Returns: Global sentiment flipped back to caution Thursday, reversing the prior session’s trend for a third consecutive day. While still up on the week, equities moved lower as more economic data reflected the widespread reach of the virus and tensions between the U.S. and China ramped up. Exports fell 22% YoY in Japan in April and 20% in South Korea in the first twenty days of May. First estimates of May PMIs for some larger economies were generally better than expected as lockdowns eased but remained deep in contractionary territory. Composite PMIs rose from 21.7 to 26.4 in Australia, from 25.8 to 27.4 in Japan, from 11.1 to 30.5 in France, from 17.4 to 31.4 in Germany, from 13.6 to 30.5 for the broader Eurozone, and from 13.8 to 28.9 in the U.K.

U.S. – China Tensions Escalate: Adding to pressure on risk markets tensions between the U.S. and China continue to escalate.  The Senate passed legislation Wednesday night which would prevent Chinese companies from being listed on U.S. exchanges.  President Trump tweeted Wednesday night that “China is on a massive disinformation campaign” to affect the upcoming presidential election and “deflect the pain and carnage [they] spread throughout the world.” He added that it “is a disgrace…It all comes from the top,” an apparent jab at President Xi’s government. Following a 0.3% decline in Asian indexes and alongside a 0.7% drop in Europe’s Stoxx 600, U.S. futures were approximately 0.5% lower before the latest jobless claims report. Treasury yields were basically flat just before that data was released. At 7:40 a.m. CT, the 2-year yield was unchanged at 0.17% with the 10-year yield 1.6 bps lower to 0.66%.


Minutes on the Outlook: The Minutes from the FOMC’s April meeting reiterated that “the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term.” Officials highlighted that “an extreme decline in employment was under way” and cited “widespread reports…of firms…curtailing plans for investment.” Even after lockdowns are lifted, officials worried that consumer spending “would not return quickly to more normal levels” and that fears of a second wave could prevent businesses from starting new projects or rehiring workers. Officials “noted several risks to long-term economic performance,” including that “some business models may no longer be economically viable,” in a post-COVID world. Looking ahead, officials said separate scenarios, including a second wave that shutdown the economy again or faster containment that allowed activity to resume, “all seemed about equally likely.”

Minutes on Policy Discussions: After highlighting the “swift and forceful” monetary and fiscal responses, officials said “even greater fiscal support may be necessary if the economic downturn persists.” Rates will stay at zero until the Fed is “confident that the economy had weathered recent events and was on track to achieve” maximum employment and 2% inflation. The committee could “at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions” by providing explicit outcome- or time-based forward guidance. They may also need “to provide further clarity regarding its intentions” for security purchases, which in the future could be used to keep longer yields low or shorter- to medium-maturity yields capped at certain levels. They did not discuss negative rates.

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