The Market Today

Fed Officials Weigh in On Negative Rates

by Craig Dismuke, Dudley Carter


Re-opening Activity: With the focus on re-opening economies, the U.K. continued to discuss its phased plan while France and Switzerland began to gradually emerge from virus-related lockdowns. Italy reported the fewest number of new cases since March 4. In the U.S., virus trends continued to diverge regionally. Illinois’s Governor said his state’s projected peak had been pushed back from mid-May to mid-June. New York City said its lockdown is likely to be extended into June while Governor Cuomo said some other parts of the state will open some low-risk businesses from May 15 and all retail businesses for curbside pick-up.

White House Responds to Virus in the West Wing: In addition to South Korea’s flare up over the weekend, another infection last week in the White House drew headlines. Vice President Pence’s press secretary tested positive recently leading to a Monday memo mandating White House staff wear masks when moving about the West Wing. President Trump said he hadn’t seen Pence since the Vice President self-isolated as a precaution. On testing, President Trump said the U.S. is running approximately 300k tests per day and he believes that Americans will be able to be tested every day “very soon.”

Fiscal Stimulus Still in the Works: Another round of fiscal stimulus continues to be discussed in Congress. The House is reportedly working on a bill which could rival the CARES Act in Dollars spent. There were reports of a bipartisan bill in the Senate to send roughly $500 billion to state and local governments to alleviate funding pressure created by the outbreak. President Trump said he wants a payroll tax cut in the next bill while Treasury Secretary Mnuchin again stressed a need to wait before agreeing to any additional measures. He said the previous installations of income support were just now making their way into the economy. Mnuchin also said the Treasury will take advantage of interest rates near zero.



Consumer Inflation Drops on Significant Volatility in Measured Prices: Headline CPI fell 0.8% MoM while core prices fell 0.4% bringing their year-over-year rates down to 0.3% and 1.4%, respectively.  It was expect that unimaginably low oil prices would be evident in April’s consumer price report after oil contracts traded to -$40 per barrel in April.  Sure enough, energy prices declined 11.2% MoM in the CPI report.  However, there were huge swings in many categories.  Food prices rose 1.5% MoM including a 4.4% increase in meat/poultry/fish prices. Most categories of goods saw price weakness.  Core goods inflation fell 0.7% MoM, the weakest month since 1957.  Apparel prices fell 4.7% MoM.  On the services sides, the largest drop in airfares (-15.2% MoM) since 1989 followed up on March’s 12.6% decline.  Overall, transportation prices dropped 5.9% MoM in April.  Also affected the by the drop in mobility, lodging prices away from home fell 7.1%, the largest decline since 1991.

Pricing Reports Not in Focus Now Given Temporary Nature of Current Situation: All of the pricing reports are expected to be distorted in the short term by the huge swings in oil prices and disruptions in the supply chain.  Also in the short-term, measuring activity that which is not occurring is difficult.  For example, trying to determine the price of a sit-down dinner in a restaurant is virtually impossible.  Over the medium term, the supply / demand dynamics have likely been changed in ways investors are still trying to understand.  Regardless of the outcome, the current inflation picture is not expected to persist for an extended period.

Small Business Confidence Falls Further But Respondents Optimistic on Rebound: The April report on Small Business confidence fell less than expected, down from 96.4 to 90.9. Respondents reported a sharply weaker outlook for sales, with a net of 30% more respondents expecting better results.  The number reporting that they had jobs openings available declined 11%, and those saying now is a good time to expand fell 10%.  The silver lining to the report, however, was a net 24% increase in those expecting the economy to improve in future months.  As far as the election impact, business confidence is now at its lowest level of President Trump’s presidency. However, the economic shutdown is expected to be temporary and the optimism seen in the economic outlook could yield a quick rebound in confidence.

Fedspeak: There is plenty to watch in the headlines today with speeches from a flurry of Fed officials.  St. Louis Bank President Bullard and Minneapolis Bank President Kashkari will kick things off at 8:00 a.m. CT.  Philadelphia’s Harker and Fed Vice Chair Quarles are scheduled to speak at 9:00 a.m. CT.  Cleveland Bank President Mester wraps it up at 4:00 p.m. CT.  Markets will be particularly interested in comments on negative rates.


Uneven Day Left the S&P 500 Almost Exactly Where it Began: The S&P 500 slipped at the open after a cluster of new cases in South Korea over the weekend gave investors some anxiety about the sustainability of reopening economies amid the COVID-19 pandemic. U.S. futures had declined with European stocks in response to the news out of South Korea, seen by most as one of the few success stories in managing an outbreak. However, the index almost immediately began to climb from there, turning positive around lunch and spending the entire afternoon above Friday’s final level.

Treasury Yields Rose with Equities and Supply: Investors hope steps to restart some activity in Europe and in several states across the U.S. will help stop the ongoing economic bleeding. After falling back in the final minute of trading, the S&P 500 ended the day almost exactly unchanged. Tech continues to lead with the Nasdaq up 0.8% and for a sixth day in a row for the first time since 2019. As equities recovered Treasury yields pushed higher, maintaining the upward trajectory through a solidly-received auction of $42 billion of 3-year Treasury notes. This week’s record quarterly refunding auctions will continue with a $32 billion 10-year auction today followed by a $22 billion auction of 30-year bonds on Wednesday. The 2-year yield rose 1.8 bps to 0.18% while the 10-year yield rose 2.7 bps to 0.71%.


Different Day, Same Focus: Global markets continued to reflect a sense of uncertainty amongst investors with major equity indexes and sovereign yields fluctuating between gains and losses again on Tuesday. The dynamics of balancing reopening economies with the risk of new infections and historically devastating economic data remains a focus. According to an email to a reporter, White House medical adviser Dr. Fauci will testify to the Senate later today that veering from the White House reopening guidelines risks “the danger of multiple outbreaks” that “will not only result in needless suffering and death” but also “set us back on our quest to return to normal.” Several states, including some that don’t appear to have satisfied the guidelines, have begun relaxing some lockdown restrictions.

Markets Remain Subdued Amid Uncertainty: China has announced it will test every resident of Wuhan after several new cases were identified in recent days. Reinforcing the impact the outbreak is having on China’s economy, producer price inflation, a metric gauging activity in Chinese factories, fell in April at its fastest rate in four years. China’s CSI 300 closed unchanged while equities across the rest of Asia fell. After an earlier decline, Europe’s Stoxx 600 was up 0.5% at 7:15 a.m. CT with futures on the S&P 500 up 0.4%, both near the highs for the session. Ahead of a busy day of Fed commentary and the 10-year auction, Treasury yields were mixed but little changed on the day.


Fed Presidents Counter Futures Pricing in Negative Rates: With last week’s lurch into negative territory by 2021 Fed Funds Futures still front of mind, a couple of Fed officials pushed back on the idea. Atlanta Fed President Bostic said he’s “not a big fan of going into negative rate territory” and is “not anticipating supporting that anytime soon.” Chicago Fed President Evans said “At best, we’d have to study [negative rates] more, but I don’t anticipate that being a tool that we would be using in the U.S.” He did, however, say he anticipates rates around zero “for quite some time” and suspects “a continuing need for fiscal support.” Fed Governor Quarles’s prepared remarks for today’s Senate testimony were released and indicate his belief that “More may be required of [the Fed] before the current crisis ends.”

Other Fed Headlines: In other Fed news, the New York Fed’s April Survey of Consumer Expectations showed “considerable deteriorations” in consumers’ economic expectations, with fears of job loss at a series high (since 2013) while outlooks for income and spending fell to new record lows. Late Monday evening the Fed released a statement that it would begin purchasing corporate bond ETFs on Tuesday using the Secondary Market Corporate Credit Facility (SMCCF) it announced in March. It also released its agreement with BlackRock, the firm tapped to manage the program, disclosing more details around how the facility will operate.

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