The Market Today
FOMC Begins Two-Day Meeting
by Craig Dismuke, Dudley Carter
Monitoring the Headlines on Reopening in the U.S.: The virus headlines remained focused on economies reopening both here in the U.S. and in major countries around the world. After nearly three months of lockdown, New York City entered the first phase of reopening on Monday. State-wide, Governor Cuomo announced the lowest positive test rate since the pandemic began and said he expects Long Island and Hudson Valley to move to phase two this week. Miami-Dade said it would reopen beaches on Wednesday and the State Department announced managers could bring up to 40% of team members back onsite.
Monitoring the Headlines on Reopening Abroad: Ahead of the U.S. trading session, the U.K. government said it would like to reopen nonessential stores on June 15 followed by pubs and restaurants on July 4. New Zealand lifted all virus restrictions except a closed-border order and ended required social distancing. Denmark eased restrictions to allow gyms, public pools, and amusement parks to open and raised the allowable gathering size from 10 to 50 people. Russia announced that Moscow would began to ease restrictions. Ontario’s Premier announced most of the province could open more types of businesses from Friday, including outdoor eating, shopping malls, and salons.
FOMC Meeting Begins: The Fed begins its two-day policy meeting today.
Small Business Confidence Improves but Remains Very Weak: Small business confidence improved in May, rising 3.5 points to 94.4, but remained weak from an historical perspective. Like other economic indicators, the NFIB report shows a steadying of sentiment in May but stops short of pointing to a strong rebound. Looking at the details, almost every underlying metric improved with the exceptions of those reporting current job openings and the earnings trend. The indices tracking how many small business leaders are expecting the economy to improve, sales to be higher, to make additional capital outlays in the future, and to increase employment all improved.
April Labor Data Expected to Show Fewer Job Openings: At 9:00 a.m. CT, the April Job Openings and Labor Turnover report is expected to show the economy lost another 441k job openings. The JOLTS data provides some unique insight into the flow of the employed and unemployed, however the lag in the reporting makes it less useful. Also at 9:00 a.m. CT, the April wholesale inventories report will be revised.
Finally, a Record for Equities: U.S. equities had a milestone Monday as the major indexes added to last week’s gains, which were spurred by optimism around economic recovery as the world reopens and capped by the surprise gain for U.S. payrolls. With no economic reports released and few headlines to shift the market’s upbeat tone, the Nasdaq rose 1.1% to a new all-time high, the first for a major index since February 19, and extended its year-to-date gain to 10.6%. The S&P 500 rose 1.2% to return to positive territory for 2020. The Dow led the way with a 1.7% gain but remains down 3.4% for the year. Reflecting the economic optimism, energy companies led all 11 S&P sectors higher on hopes for stronger demand and airlines surged more than 9%.
Longer Yields Edged Back: While equities were already comfortably in positive territory, they jumped to new highs after the Fed announced it was broadening its Main Street Lending Program and easing the terms of loans issued under the facility (more below). Significant accommodation from the Federal Reserve has kept markets from falling apart amid economic collapse and Treasury yields low even with historic issuance to fund unprecedented fiscal stimulus. Despite Monday’s equity rally, longer yields fell back after breaching trading ranges Friday. While the 2-year yield added 2 bps to 0.23%, a new high since April 13, the 10-year yield slipped 2.0 bps to 0.88%.
Stocks Retreat after U.S. Index Set a Record: Considering the size and speed of equities’ recent ascent, a pullback overnight following another strong daily gain that pushed the Nasdaq to a record is not all too surprising. After Asia tracked yesterday’s move up on other continents, stocks have retreated in Europe and U.S. futures have declined. In the absence of meaningful economic news Tuesday or a sentiment-shifting virus development, investors were left to reflect on and reconcile equity valuations close to pre-pandemic levels with facts on the ground of historic economic contraction. Europe’s steep 3.8% first quarter contraction was revised up to -3.6% and German exports and imports by larger-than-expected, record amounts in April.
Yields Fall Farther From Recent Highs: Despite some early signs of minimal economic recovery, a contributor in part to the stock rally in recent weeks, Fed officials aren’t expected to sound much more optimistic about the outlook after two days of deliberations that kickoff today. With the Fed expected to be on hold for the foreseeable future, yields have remained low. Yesterday’s yield decline from multi-week highs strengthened overnight amid softer equity results, with the 2-year yield down 0.6 bps to 0.22% at 7:30 a.m. CT and the 10-year yield 4.3 bps lower at 0.83%. With risk appetite fading, oil prices declined and gold rose with the Japanese yen.
Fed Announced Significant Changes to Main Street Lending Program: The Federal Reserve announced several changes to its Main Street Lending Program to widen the facility’s reach and ease the terms of the related loans. More businesses can now access funds from the program due to a smaller minimum loan size, lowered from $500,000 to $250,000 for new and priority loans, and a larger maximum loan size, with adjustments varied across the three loan types. There were also key changes to terms of loans available under the program. Loans will mature in five years from origination instead of four and principal payments will be deferred for two years instead of one. Each loan will now amortize 15% in years three and four with a 70% balloon payment in year five. One change unique to priority loans, banks will retain just 5% of the loan amount instead of the initial 15% requirement, aligning it with the other two loan types.