The Market Today

Fed Officials Talk Down Negative Rates Ahead of Powell Speech

by Craig Dismuke, Dudley Carter


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

The rate of growth of newly-diagnosed cases appears to have turned the corner for most U.S. states (see Chart of the Day).  This should prove to be a positive turning point for the resumption of economic activity for most states.  However, a significant amount of damage has already been done, damage that is likely to keep the level of economic activity below its previous peak for several years.


House Aid Bill Would Nearly Double Stimulus To-Date: House Democrats released draft text of plans to spend $3 trillion in a fifth stimulus bill. According to the WSJ’s reading, the bill would send roughly $1 trillion to state and local governments, provide more direct payments to Americans similar in size to those in the CARES Act ($1,200 per person, $1,200 per up to three dependents), repeal the SALT cap from the 2017 tax bill, offer greater tax incentives for companies to retain employees (up to $12,000 per employee each quarter), and provide monies for increased broadband access, food assistance, and the U.S. postal service. In addition, the bill would extend the $600 weekly bump in unemployment to January.  As written, the bill has little chance to pass the Senate.

Federal Deficit Surges Amid Stimulus Efforts: The Treasury’s monthly budget statement reflected record spending of $979.7 billion in April as the government sought to support the economy amid mandated economic lockdowns to slow the spread of COVID-19. The surge in spending paired with lower revenues created a record monthly deficit of more than $737 billion. In response, the cumulative deficit in the twelve months through April surged to $1.93 trillion, or nearly 9% of GDP. With the deficit expected to continue to swell and the economy expected to shrink significantly in 2Q, that metric should quickly surpass the 10.1% measure from 2009.

Fauci Fears Some States May Re-open Too Soon: Dr. Fauci told Senators Tuesday that, “If certain areas prematurely open up, …we might see spikes that turn into outbreaks, …The consequences could be serious.” He added that, “Even in states that reopen with a deliberate pace…there is no doubt that when you pull back on mitigation, you will see some cases reappear.” Nationally, “I think we’re going in the right direction,” he noted, “but the right direction does not mean we have by any means total control of this outbreak.” He hopes to see the curve come down by June but noted it’s possible a re-emergence in the fall could be worse. He’s “cautiously optimistic” the world will find a vaccine and said it’s “very likely” antibodies after recovery help protect against re-infection. He said data showing severe effects from the virus on some children are a concern, admitting there’s no “easy answer” about reopening schools in the fall.

Other Notable News: In addition to the U.S.’s study of additional stimulus, the U.K. announced an extension of its wage subsidy program through October while India disclosed a relief package worth 10% of GDP. Germany reported that its virus reproduction rate fell from 1.07 to 0.94 while New Jersey’s Governor said his state will soon be the hardest-hit on a per capita basis. Tying back to Dr. Fauci’s testimony, New York Governor Cuomo said his state has roughly 100 cases of children with an inflammatory syndrome that is potentially COVID related. California’s governor said 70% of his state’s economy is open with some level of operational modification.



Fed Chair Powell to Speak: All eyes will be on Fed Chair Powell’s speech hosted by the Peterson Institute today at 8:00 a.m. CT.  The speech was scheduled last Friday, the day after Fed Funds Futures dipped into negative territory for the first time.  Fed officials have come out en masse saying that negative rates are not a preferred policy step, but stopping short of taking them off the table completely.

Mortgage Applications Inch Higher: Mortgage applications for the week ending May 8 inched up 0.3% on an encouraging 10.6% increase in purchase apps and a 3.3% drop in refi apps.  Purchase applications have now increased for four consecutive weeks.  Mortgage rates did not drop during the week but remained within 3 bps of all-time lows.


Stocks, Yields Fluctuated Before They Fell as Uncertainty Persists: After a relatively unexciting morning session, stocks and Treasury yields moved decidedly lower around lunch and fell steadily throughout the afternoon. While there were plenty of headlines to sift through, equities turned lower as a group of Republican Senators introduced a bill to sanction China for the outbreak. The downward pressure on yields was enhanced by an auction of 10-year Treasury notes that stopped through by 1.2 bps on the best bid-to-cover in two years. Both developments occurred after Dr. Fauci warned Senators about risks of states opening prematurely. Following a rapid final-hour descent, the S&P 500 fell 2.1% and closed at its low for the day. The 2-year yield slipped 1.6 bps to 0.16% while the 10-year yield fell 4.5 bps to 0.67%.


Slow News Night, Markets Look to Powell: A lack of significant news overnight left investors pondering the virus path and the probability that re-opening economies can create an economic rebound without sparking a resurgence of infections. Stocks were mixed across Asia and fell in Europe to push the Stoxx 600 down 1.1%. Dreary earnings appeared to add pressure in a day that also included a record (since 1997) 5.8% monthly contraction in March (not annualized) for the U.K. economy and record (since 1991) 11.3% plunge in Eurozone industrial output in March. Before this morning’s webcast with Fed Chair Powell, U.S. futures played the contrarian by pushing 0.7% higher at 7:40 a.m. CT while yields inched lower. The 2-year yield fell 0.4 bps to 0.16% while the 10-year yield dropped 2.3 bps to 0.65%.


Harker Sees Uneven Recovery: Philadelphia Fed President Harker believes even under the best scenario a recovery will be “uneven,” with manufacturing recovering more quickly than other sectors such as leisure. Interest rates will be near zero “for some time,” and while banks are well capitalized, they face risks from heavy exposure to commercial real estate, a sector he believes will see notable changes in the post-COVID world.

Bullard Said Full Lockdown Must Be Replaced with “Risk-Based” Virus Approach: St. Louis Fed President Bullard said a prolonged shutdown will cause “business failures on a grand scale” and risks a depression. “There’s a 90-day limit…maybe 120 days,” on a full lockdown. Negative rates are “not a good solution for the U.S.” and if the Fed needs to do more, increased asset purchases are the best option.

Kashkari Expects a Slow Crawl out of a Deep Recession: Minneapolis Fed President Kashkari said there might be an “uneven crawling back” to a normal economy considering the depth of the destruction and uncertainty that will linger. He addressed negative rates by saying “There are other tools we would go to first.”

Kaplan Expects More Support Will Be Needed, Just Not from Negative Rates: Dallas Fed President Kaplan said he expects more fiscal stimulus will be necessary to support a recovery but added his name to the list of Fed officials who “would be against negative interest rates.”

Mester Sees Uncertain Case for 2H20 Rebound: Cleveland Fed President Mester expects unemployment to exceed 20% but sees a reasonable, yet highly uncertain case for a second half recovery. However, “further fiscal support will be needed” to prevent lasting effects and she would try other tools before considering negative rates.

Fed Updated TALF Term Sheet: From the related press release, the Fed “announced additional information regarding borrower and collateral eligibility criteria for the Term Asset-Backed Securities Loan Facility (TALF).”

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