The Market Today
Fed Officials Cite Need for More Stimulus; Second-Wave Fears Hit Markets
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: U.S. cases have ticked higher in recent days but focus remains centered on the outbreak across Europe that has led government officials to reintroduce restrictions. Spain and Italy both saw large increases in daily infections and U.K. infections jumped just a day after the U.K. announced new restrictions to slow the spread. Cases in France surged more than 13k as officials announced new measures to address the accelerating outbreak, including limiting the size of gatherings in larger cities and forcing bars in Paris to close earlier. Additional and more specific restrictions were doled out across various cities.
Second Wave … of Fedspeak: After yesterday’s deluge of Fedspeak (details below), there’s another wave today including Dallas’ Kaplan (7:50 a.m. CT), St. Louis’ Bullard (11:00 a.m.), Chicago’s Evans (12:00 noon), Richmond’s Barkin (12:00 noon), New York’s Williams (1:00 p.m.), and Atlanta’s Bostic (1:00 p.m.). In addition, Fed Chair Powell and Secretary Mnuchin will again testify on the policy response to Covid, this time before the Senate Banking Committee at 9:00 a.m. The theme from yesterday’s communications was clearly that the economic recovery needs more fiscal stimulus to be sustained.
Initial Claims Show Stagnation in Labor Recovery: Initial jobless claims for the week ending September 19 inched up from 866k to 870k, disappointing expectations for a 20k decline. On a non-seasonally adjust basis, claims rose from 796k to 825k and have now been stuck in a range between ~800k and ~900k for the past seven weeks. On a positive note, initial PUA claims declined 45k to 630k, bringing the total number of initial jobless claims during the week 1.500mm, the lowest weekly total March.
Continuing Claims Show Improving Labor Market: Continuing jobless claims were more encouraging that the initial claims series. The traditional state programs showed a decline of 167k claims to 12.58mm for the week ending September 12, following up last week’s very strong results with another positive result. Albeit still high, this marks the lowest number of continuing claims since early-April. In the pandemic-related programs for the week ending September 5, PEUC claims (program which extends state-level benefits upon expiration) rose 104k to 1.63mm, the highest of the cycle. Continuing PUA claims (program which expands eligibility to persons not covered under the traditional state programs) saw their largest improvement of the recovery, down 2.96mm to 11.51mm. This was more-than-entirely driven by a 3.01mm drop in California. There is no special note in the DOL report explaining the volatility in California’s data.
New Home Sales and Regional Fed Index: At 9:000 a.m. CT, the August New Home Sales report is expected to show sales drop back 1.2% after a monster month in July. Also today, the Kansas City Fed Manufacturing Activity index (10:00 a.m.) for the month of September is expected to remain flat at a positive level.
Stock Decline Resumed with S&P 500 Nearing Correction: An opening gain for the S&P 500 on Wednesday proved to be a head fake as the upbeat start to trading quickly reversed, sending the index to its sharpest slide in over two weeks and to its lowest level since late July. The broad-based weakness that knocked the index down 2.4% Wednesday and within 0.5% of a correction was led by tumbling energy shares and a more-than-3% decline in tech stocks. The Nasdaq led declines with a 3.0% drop while the Dow fell just under 2%. Stocks have been battered in recent weeks by a sell-off in tech shares amid concerns about the outlook, with the virus still spreading, the recovery showing signs of slowing, the majority of earlier fiscal stimulus in the past, and Congress at a stalemate with the White House on additional aid.
Treasury Yields Remained Unexcitable: Markit PMI data overnight ahead of the U.S. session showed the European services economy contracted unexpectedly in September amid a second wave of the virus that has driven government officials there to reintroduce some social restrictions. While the U.S. PMIs released later in the day were roughly in line with expectations, the services index showed a slower pace of expansion early in September. The mixed signals and significant uncertainty that surrounds the outlook led to the crew of Fed officials making remarks throughout the day to collectively call for more fiscal support (more below). Despite the sharp drop for equities, however, Treasury yields remained moribund. The 2-year yield dipped 0.4 bps to 0.14% while the 10-year yield fell even less, edged 0.2 bps lower to 0.67%.
U.S. PMIs Nearly Match Expectations: Preliminary Markit PMIs for September showed the U.S. recovery has slowed a bit in recent week as gains in the manufacturing sector were offset by a marginally softer pace of expansion in the services economy. The manufacturing index rose from 53.1 to 53.5, matching expectations at its strongest level since January 2019, while the services index cooled from 55.0 to 54.6, fractionally weaker than the 54.7 expected. Levels remained well above their historic lows from April but the slowdown in the services index warrants watching as cases tick higher and new fiscal stimulus remains elusive.
ONSLAUGHT OF FED COMMUNICATIONS
Mester Remains Concerned about Fragile Economy: Cleveland Bank President Mester speaking at a conference on payment systems and digital currencies highlighted the economy’s need for continued support, saying “It’s not a sustainable recovery, it’s still fragile.”
Evans Gives One Answer to What Inflation “Overshoot” May Mean – 2.5%: Chicago Bank President Evans gave further clarification of his interpretation of the Fed’s new flexible average inflation targeting, specifically highlighting what he views as a “moderate” overshoot of 2%. He said, “I do not fear stronger accommodation in the pursuit of clearly overshooting 2%, even to the point of 2-1/2, or even a little bit more.” As it pertains to additional fiscal stimulus, Evans indicated that his forecast was predicated upon approximately $1 trillion in additional support.
Rosengren Concerned about Second Wave, Stimulus Unlikely Anytime Soon: Boston Fed Bank President Rosengren acknowledged being more concerned about near-term growth than some of his colleagues. According to MarketWatch, he said “My views are that the economy remained fragile… I am concerned that a second wave of Covid-19 infections this fall and winter is likely, which could cause some states to impose new restrictions on mobility…” He advocated for more fiscal stimulus but noted that it “seems unlikely to materialize anytime soon.”
Vice Chair Quarles Sees School Closures as Necessitating More Economic Support: Fed Vice Chair Quarles voiced a very positive assessment of the economy’s rebound but noted downside risks to the continuation of the recovery. Justifying his belief that additional support is needed, he said, “one area where increased understanding of the disease has, in many places, not led to general changes in practice is in the widespread school closures this fall. Many parents with children will be forced to work less, or not at all, which is going to be a hardship for them and weigh on the economy. So, I agree with Chair Powell that it will take continued support to sustain a robust recovery.” On the Fed’s new monetary policy framework, Quarles noted, “a low unemployment rate, unless accompanied by worrisome developments in inflation or other risks … would not necessitate a policy response.”
Bostic Advocates for Stimulus So Temporary Job Losses Do Not Become Permanent: Atlanta Bank President Bostic reiterated the call for more fiscal support noting that “with relief running out there is a pretty significant chance that some of the temporary disruption and dislocation can become permanent.” Bostic said, “I am hopeful that policy makers in Washington as well as at the state level find creative ways to get that support out there.”
Daly Says Inflation Will Drive Future Policy, Not Employment: San Francisco Bank President Daly indicated that officials would not rely on “some artificial number” as being indicative of maximum employment and a trigger for policy action. Rather, she leaned more toward the single-mandate approach saying, “We are going to let inflation be the guide of that… We are committed to allowing the economy to run until we find out what maximum employment means experientially – when we start seeing it show up in higher wages and higher prices.”
Powell Says No Plans to Dramatically Change Main Street Lending Program: Fed Chair Powell was grilled about the lack of participation in the Main Street Lending Program, designed to provide liquidity to smaller companies but which requires underwriting banks to assume 5% risk on loans. While he indicated that Fed officials were looking at changes to the program, he also noted, “There’s nothing major that we’re looking at now… There is nothing major that we see now that would be consistent with opening it up further.”