The Market Today

Fed Signals Low Rates For Long Period; BOE to Examine Negative Rates


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)

Monitoring the Virus Headlines: Several European countries saw cases increase from a day ago while U.S. infections rose by a below-average 0.4%. However, more attention was given to plans for vaccine distribution. While there were mixed signals sent by health officials about when a vaccine may be ready – some said April 2021 while others said 2Q or 3Q of 2021 – the administration is planning is to begin shipping the vaccine within 24 hours of its approval, whenever that may be. On stimulus, there continued to be talk about the need for more but no signs of moving forward with any specific bill that has been proposed.

 

TODAY’S CALENDAR

Jobless Claims Remain High but Data Shows Signs of Progress: Initial jobless claims for the week ending September 12 dropped 33k to 860k, remaining higher than economists expected.  On a more positive note, new PUA claims fell 210k to 659k bringing the total number of new claims filed during the week down 243k to 1.52mm, the second-lowest level of the pandemic.  Continuing jobless claims for the week ending September 5 dropped a better-than-expected 916k to 12.63mm, the second-largest weekly decline since early July.  The improvement was broad-spread with 46 states seeing declines.  PUA continuing claims fell 189k to 14.47mm for the week ending August 29 but extended PEUC claims rose 105k. Combined, the total number of persons filing for some form of unemployment assistance during the August 29 reference week rose 167k to 29.5mm.  More encouragingly, the better-than-expected results for the September 5 reference week point to this total tally improving.

Housing Starts and Building Permits Disappoint: The August Housing Starts and Building Permits data disappointed expectations as starts declined 5.1% and permits dropped 0.9%.  Combined with positive revisions to June’s figures and negative revisions to July’s, starts were reported 4.8% lower than economists expected in August while permits proved 2.8% lower.  The new construction figures are notoriously volatile, including large revisions (as was the case with the current report).  Additionally, homebuilder confidence, as reported by NAHB yesterday, hit a record-high level in September.


YESTERDAY’S TRADING

Market Volatility Followed Fed Decision: The major market focus Wednesday was on the Fed’s decision to codify its news policy framework to keep rates low until inflation moves moderately above 2% into its Official Statement and updated projections (more below). Stocks had gained in morning trading after a mixed global session and yields had moved down heading into the decision. As the Fed materials were released and the related headlines began to roll across Bloomberg terminals, stocks added to gains and Treasury yields began to creep higher. Those moves intensified during Powell’s press conference, with stocks and yields both reaching new peaks during the Fed Chair’s remarks.

Yield Curve Steepened as Fed Reiterated It Wants to See Inflation Overshoot Before Raising: While Treasury yields held those levels, however, stocks turned lower in the final hour of trading. After gaining as much as 0.8% just before 2 p.m. CT, the S&P 500 ended the day down 0.5% with tech names leading the reversal. Only five sectors closed up on the day with an 4% gain in energy shares easily outpacing every other sector. Oil prices rocketed higher after data showed U.S. inventories shrank unexpectedly to their lowest level since April. The shift in yield levels and the shape of the curve was consistent with the Fed cementing expectations for rock-bottom rates until above-target inflation is sustained “for some time.” The 2-year yield dipped 0.2 bps to 0.14% while the 10-year yield, more heavily impacted by inflation and inflation expectations, added 1.8 bps to 0.70%. The 30-year yield rose 2.8 bps to 1.46%.


OVERNIGHT TRADING

Central Banks Remain in Focus: Foreign equity markets are exclusively lower Thursday and yields across Europe reflect a risk-off shift, with most peripheral yields edging higher while yields in Germany and France declined. The drop for global equities followed a late-afternoon sell-off in the U.S. Wednesday that unfolded in post-Fed trading. The central bank headlines continued to roll in overnight as the banks in Japan and England announced their latest decisions. Both central banks voted to leave the current stance of policy unchanged and both stressed that the outlook remains highly uncertain after acknowledging that activity had picked up some. In his press conference after the decision, Bank of Japan Governor Kuroda reiterated his ongoing commitment to allow inflation to move above 2%. While not currently desired, the Bank of England continued to discuss negative rates as a possible tool for future use, beginning a “structured engagement” with U.K. regulators on how it might implement such a program according to today’s Minutes.

Treasury Yields Reverse Yesterday’s Move as Equities Continue to Decline: Yields in the U.K. were leading the decline in major global sovereign yields with the discussion of negative rates likely behind the front-end falling more rapidly in a curve-steepening trade. The U.K. 2-year yield had declined 5.7 bps to -0.13% while the 10-year yield fell 3.9 bps to 0.17%. The British pound was notably weaker against both the U.S. dollar and euro following the decision. Before the jobless claims data were released, stock futures were notably weaker and Treasury yields had reversed all of yesterday’s move higher and steeper. Futures on the Nasdaq were down 2% while contracts on the S&P 500 dipped 1.3%. The 2-year yield was 0.8 bps lower while the 10-year yield had declined 3.4 bps to 0.66%. The 10-year yield moved to down 4.6 bps after the claims data.


NOTEWORTHY NEWS

Fed Overhauls Communications, Raises Bar for Future Policy Tightening: In their first policy decision after formally adopting an inflation averaging scheme, the FOMC voted to hold its target rate range unchanged at 0.00-0.25% and continue purchasing securities at the same rate.  The Official Statement was overhauled to reflect their newly defined approach.  The Statement now reads, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.  With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” This shift in approach raises the bar for any future tightening of policy.  Not only will inflation need to appear to be returning to 2 percent, as has been the case in recent history, it will now need to convincingly average 2 percent over some period of time before Fed officials will be open to tightening policy.

Summary of Economic Projections Shows Faster Recovery but No Intention of Raising Rates: The updated SEP illustrated the lack of urgency in tightening policy.  Only one participant projected a target overnight rate range above 0.00-0.25% by year-end 2022, down from two participants in the June SEP.  Moreover, only four of fifteen participants projected liftoff through year-end 2023.  Included in the forecast revisions were less economic contraction in 2020 (-3.7% versus -6.5% in June’s SEP) and a lower unemployment rate throughout the forecast horizon (year-end 2020 revised down from 9.3% to 7.6%).

Home Builder Confidence Rises Unexpectedly in September to a Record as Housing Stays Hot: The NAHB’S Home Builder Confidence Index rose unexpectedly in September to a new record for the series, showing housing’s v-shaped recovery remains uninterrupted. Economists had expected the index to hold at 78 after four monthly gains had pushed the index into a tie with its record high from 1998. However, strong gains across each of the three main sub-indices added an additional 5 points to the index, setting a new record of 83 for a series that reaches back to 1985. The current sales index rose 4 points while a gauge of expected sales in six months increased by 6 points. An index tracking foot traffic of prospective buyers jumped 9 points. The NAHB’s Chief Economist said that despite a 170% increase in the cost of lumber since mid-April adding roughly $16,000 to the cost to build a new home, “the suburban shift for home building is keeping builders busy, supported on the demand side by low interest rates.”


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