The Market Today
Fed on Pause as Economy Continues to Recover Lost Ground
by Craig Dismuke, Dudley Carter
Economy Grows 6.4% in 1Q as Stimulus and Re-Openings Help Accelerate Recovery: The U.S. economy continued its recovery from the COVID-19 contraction, recovering another 6.4% in 1Q21. The headline growth rate was weaker than the expected 6.7% and driven by a mix of results. The core PCE deflator jumped from 1.3% in 4Q to 2.3% in 1Q as prices continued to recover from the pandemic-related losses. By sector, consumption gained a stellar 10.7%, aided by two stimulus transfer programs. Another large quarter for business investment in equipment, up 16.7%, offset a disappointing 4.8% contraction in investment in structures. Meanwhile, residential investment continues to be an engine of growth, up a solid 10.8%. Government expenditures jumped 6.3%, lifted by a 45% increase in federal non-defense spending, again the outworking of unsustainable, deficit-funded stimulus programs. External trade dragged 0.9% from the final tally as imports jumped 5.7% but exports declined 1.1%. After contracting 10.1% through the first two quarters of 2020, the U.S. economy is now back to within 0.9% of its pre-pandemic peak.
Jobless Claims Data Show Labor Market Recovery Continues: For a third week in a row, new jobless claims in regular state programs fell to a new low for the pandemic. Claims dropped 13k to 553k in the week ended April 24, a slight disappointment relative to expectations. The prior week was revised up from 547k to 566k. New claims in the emergency PUA program also declined, falling 11k to 122k, also a new pandemic low. State-level data showed the weekly improvement was broad-based across most of the country.
Conversely, and a bit discouraging, seasonally adjusted continuing state claims inched 9k higher to 3.66mm, marking the first weekly increase since the first week of January. Non-seasonally adjusted claims, however, dropped 50k and more states saw claims decline than rise. At the broadest level, total claims in all programs, including pandemic emergency programs, dropped 846k to 16.6mm, a new pandemic low. While the size of the swings in total claims continues to be distorted by noise in reporting from a couple of states, the directional message of improvement appears consistent with other evidence showing the labor market has continued to recover in April.
Pending Home Sales; Amazon Earnings Ahead: March’s pending home sales report (9:00 a.m. CT) is expected to show a rebound of 4.4% in existing homes going under contract for sale, following a 10.6% decline in February. Speaking from the Fed today is Vice Chair Quarles (10:00 a.m.). The corporate earnings calendar continues with results from Amazon, Twitter, and Royal Caribbean, to mention a few.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
FOMC Remains Patient Citing Improved Economic Outlook and “Largely Transitory” Increase in Inflation: As expected, the FOMC voted unanimously to keep the overnight target range at 0.00%-0.25% and continue purchases of $40B MBS and $80B Treasury securities per month. Reflecting the pick-up in activity evidenced across recent economic reports, the Official Statement was revised to note that, “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.” The Statement also acknowledged the increase in inflation metrics but noted that this “largely reflect[s] transitory factors.” On balance, officials’ risk assessment was more favorable, replacing the March language of “considerable risks to the economic outlook” with a less concerned note that “risks to the economic outlook remain.”
Chair Powell’s press conference wasn’t much more exciting. Those hoping to have more clarity on when the Fed might taper asset purchases were likely disappointed. While Powell rattled off all of the indicators that evidence improvement in activity and the future outlook, he reiterated that the economy is a long way from the Fed’s goals and that it would take “some time” to trigger the “substantial further progress” that could support tapering bond purchases. He stood firm in the belief that inflation will move up further this year, primarily reflecting base effects and bottlenecks in the supply chain, but that it would moderate. He explained that choosing the word “largely” in quantifying the share of the inflation increase that was transitory was simply less controversial than something more definitive, considering that certain prices are always moving about. The biggest market mover appeared to be a comment that “some things in equities do reflect froth in markets,” a remark that led to a sharp drop in equity markets.
24 HOURS OF MARKET ACTIVITY
Treasury Yields Declined as Powell Reiterated Patience While Stocks Slumped on His Comment About “Froth”
Equity markets were little changed heading into the Fed’s afternoon announcement but longer Treasury yields had moved higher. The 10-year Treasury yield was trading up more than 2 bps as investors awaited the latest Fed statement and press conference, curious if either might signal the start of conversations among Fed officials related to tapering asset purchases. Stocks and yields both swung about around the statement’s release but had calmed before Chair Powell’s press conference. As Powell reiterated continued support until “substantial further progress” is made, alleviating near-term tapering fears, the 10-year yield fell to a new session low and the S&P 500 hit its daily high. While lower yields stuck until the close, the major stock indices dove back into negative territory about the time Powell said there was some “froth” in equity markets. With the Fed punting on any changes to policy or its forward guidance, the 10-year yield closed down 1.2 bps at 1.61%. Despite the lower yields, the S&P 500 slipped 0.1%.
Treasury Yields Reverse Higher on Thursday with Market-Based Inflation Expectations Also on the Rise
Treasury yields are on the rise Thursday before the BEA releases its first estimate of U.S. GDP growth in the first quarter and the Department of Labor announces jobless claims data for last week. It’s been a busy 24 hours for investors. President Biden addressed members of both the House and Senate in a televised address last night, spending most of his time urging Congress to get behind his plan to spend $4 trillion updating U.S. infrastructure and supporting American families, the details of which were released earlier Wednesday. Prior to his speech, Facebook and Apple both announced stellar quarterly results, joining a growing list of companies whose results reflect growing optimism and increased activity and sending shares of both higher before the open. But despite growing evidence of the U.S. recovery gaining steam and lawmakers’ push to provide trillions more in stimulus, the Fed kept policy unchanged and said any boost to inflation will likely be transitory. Nonetheless, 10-year market inflation expectations were up notably overnight to 2.45%, the highest level since early 2013. Nominal yields were up more, as the 10-year yield 5.7 bps higher to 1.67%, near a three-week high. The positive earnings and a generally strong global session lifted U.S. stock futures, the Nasdaq by more than 1%.