The Market Today
Fed Projects Slow Recovery; Virus Cases Accelerate in Some States
by Craig Dismuke, Dudley Carter
Vining Sparks Coronavirus Chartbook (PDF) (Link): The number of new cases in the U.S. has now crossed 2 million. However, the daily growth rate remains in-line with the trend over the past two weeks, near 21k new cases each day. Of concern now, the new cases are coming from different states than the original outbreak. Some of the fastest growing outbreaks (comparing the 7-day average versus the 14-day average) are now found in California, Texas, Florida, Nevada, Oregon, North Carolina, and Arizona.
Monitoring the Headlines on Stimulus: While Wednesday’s primary market focus was on the Fed’s afternoon decision, there were several meaningful headlines related in one way or another to the pandemic. Keeping with the central bank theme, an ECB official from Italy said policy will have to stay easy for a long time. From a fiscal perspective, Treasury Secretary Mnuchin said more targeted aid will “definitely” be needed, with restaurants and hotels specifically needing assistance. White House adviser Kudlow said it feels like we’ve hit a “turning point” with the virus and that some return-to-work relief is under consideration. Addressing existing efforts, Mnuchin said $12 billion in PPP funds have been returned and could potentially be used to help businesses hurt by looting during nationwide protests. The head of the SBA said there were approximately $130 billion in PPP funds available.
Monitoring the Headlines on Reopening: More directly tied to the virus, the WHO said the outbreak is still growing in many places around the world with the rapid rise in Latin America now putting the region’s health care systems under significant strains. Eli Lilly said it could have an antibody treatment authorized by September. Maryland’s governor announced indoor dining could resume Friday and gyms and malls could open June 19. Less upbeat, Texas reported its largest jump yet of the pandemic. President Trump announced he would hold his first rally since the outbreak on June 19 in Oklahoma.
Monitoring the Headlines from the Corporate World: Capital One’s CEO said the company has recently received 70 thousand forbearance requests versus 175 thousand in March. Citigroup’s CFO said many customers who had made forbearance requests were still making payments but said credit card spending had declined 20% in May. American Airlines disclosed it was currently averaging 127 thousand passengers per day, up from 87 thousand in May, and burning $40 million in cash per day, down from $50 million in May. Caterpillar announced that it was extending some plant closures because of negative effects of the virus on demand.
Initial Claims Continue to Decline but Continuing Claims Did Not Fall As Much As Expected: Initial jobless claims for the week ending June 6 increased another 1.54 million, in-line with expectations. The number of new claims each week continues to decline for a tenth week, down from 1.90 million in the previous week, but remains very high from an historical context. Over the last twelve weeks, 44.2 million people have now filed for unemployment insurance. Continuing claims pulled back 339k to 20.93 million, a smaller improvement than was expected. As the earliest indicator of people returning to the labor market, the smaller decline was quite disappointing.
Fed Affirms Market Expectations of Low Rates for Longer: As expected, the sharpest market moves Wednesday occurred around the release of the Fed’s updated projections which reaffirmed market expectations that officials have no plans to raise rates any time soon (more below). Equities had weakened in early trading following a mixed global session as the recent rally stalled ahead of the Fed’s afternoon announcement. In the immediate aftermath of the decision, stocks surged into positive territory and Treasury yields fell, likely a response to the Fed’s pledge to keep interest rates near zero through at least 2022 and continue buying bonds at the current pace, removing the risk they cut off purchases in response to improved market functioning.
Long Recovery Ahead: However, as the reality behind those pledges began to resurface, stocks turned lower and yield’s decline accelerated. The Fed’s updated economic projections, the first since the pandemic pushed the world into recession, painted a dire scenario of a long-drawn-out partial recovery over several years. While the Nasdaq held a gain to record a third consecutive all-time high, the Dow fell 1.0% and the S&P 500 declined 0.5%. All three closed above lower morning levels but finished well off their post-Fed highs. Not surprising, the implications of an extended period of low rates and elevated credit risk for bank profits weighed heavily on financials, which closed just ahead of energy’s last-place finish. The 2-year yield fell 3.6 bps to 0.17% while the 10-year yield tumbled 9.9 bps to 0.73%.
Global Equities Turn Lower as Economic Worries Return: U.S. equity futures are sharply lower Thursday amid a global sell-off sparked by the Fed’s discouraging economic outlook and an increased focus on an uptick in new cases in some U.S. states. At 7 a.m. CT, S&P 500 and Dow futures and Europe’s Stoxx 600 were down by at least 2.2% after an earlier 1.8% decline in Asia. The Fed’s disheartening forecast represents the median point of individual expectations, which were wide-ranging in response to a high level of economic uncertainty caused by an unknowable path of a virus. The angst was exacerbated by murmurings of a possible second wave in the U.S. that could thwart early signs of some recovery. Several states, including Texas, Arizona, California, and Florida; have seen an uptick in cases after reopening.
Yields Decline Amid Risk-Off: Yesterday’s drop in Treasury yields and the overnight decline in equities has pushed European yields notably lower, with 10-year yields in the region down between 5 bps and 7 bps on average. Ahead of this morning’s update on jobless claims, Treasury yields were mixed. At 7:25 a.m., the 2-year yield had inched up 0.6 bps to 0.17% as the 10-year yield slipped another 3.6 bps to 0.69%. Those moves held up after the weekly improvement in the jobless claims figures.
Fed’s Decision and the Statement: As expected, the Fed voted unanimously to keep policy unchanged, making only minor changes in the statement to highlight improved financial conditions since April and to put a floor under asset purchases “at least at the current pace” instead of “in the amounts needed.” The latter change was echoed in the implementation note and clarified in a release from the New York Fed to approximate $80 billion in Treasurys per month and $40 billion in agency MBS. There was no mention of the shocking improvement May’s jobs report, with officials keeping language describing “sharp declines in economic activity and a surge in job losses.” Powell acknowledged May’s positive payroll surprise but quickly shifted to focus on the net job loss since February and BLS caveat that unemployment should have been higher. His overarching tone remained highly cautious about sustained economic improvement and highly certain about a long road to recovery.
The Real Story Was in the Fed’s SEP: The Fed released its first set of projections since December, having skipped the planned March iteration because of the high level of uncertainty at the time. They expect the economy to contract 6.5% in 2020 before rebounding 5.0% in 2021 and 3.5% in 2022, compared with long-run potential growth of 1.8%. Compared with the pre-pandemic 3.5% rate and longer-run neutral estimate of 4.1%, unemployment is now expected to end 2020 at 9.3%, end 2021 at 6.5%, and end 2022 at 5.5%. Core inflation is projected to undershoot the 2.0-percent target through 2022, rising only to 1.7%. As a result of significant economic slack expected to persist over the forecast horizon, 15 of the 17 participants expect the target range to remain at the effective lower bound through 2022 (one expect one hike in 2022, another expects four). Fed Chair Powell said during an answer to a question, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
The Bottom Line: Fed officials sent a clear message: the economic damage from the pandemic has been significant and it will likely take years to recover. There will be a significant amount of labor slack through 2022 and interest rates will be anchored near-zero for the foreseeable future.