The Market Today
FOMC Unlikely to Change Policy, Likely to Give Strong Forward
by Craig Dismuke, Dudley Carter
Monitoring the Headlines: When Azerbaijan extending its lockdown until July 1 lands in the daily top ten list, it obviously was a day of few developments. New York City saw a 1% positive rate for the first time since its outbreak began, and Westchester and Rockland entered the second phase of New York’s reopening plan. With his state registering the third-slowest outbreak relative to peak infection of all 50 states, New Jersey’s governor lifted the stay-at-home order, effective immediately. In Europe, Germany was reportedly planning to extend travel warnings for non-European countries. From the corporate world, Visa’s CFO said the company has seen a shift from credit transactions to debit, a normal occurrence in periods of uncertainty, but expects a relatively fast recovery from the virus disruptions.
FOMC Unlikely to Change Policy, Likely to Give Strong Forward Guidance via SEP: The FOMC will conclude its two-day policy meeting today with an Official Statement and SEP released at 1:00 p.m. CT. We expect no changes in monetary policy at this time but for the economic assessment to acknowledge the unexpected improvement in payrolls. Officials are likely to continue characterizing the situation as extremely uncertain. Perhaps most interesting will be the first Summary of Economic Projections since December. Officials may provide two sets of projections, including a baseline forecast and a downside risk forecast given their recent talk on the topic. Doing so could prove to be a powerful forward guidance tool. Of primary focus will be 1) how much GDP is expected to contract in full-year 2020, 2) how far above February’s 3.5% unemployment rate officials believe the rate will be at year-end, and 3) if officials project any rate hike over the three-year forecast horizon. Fed Chair Powell will host a press conference at 1:30 p.m.
Mortgage Applications Continue to Improve: Mortgage applications for the week ending June 5 rose 9.3% as mortgage rates remained historically low. The 30-year rate, according to the MBA report, inched up 1 bp to 3.38% after hitting an all-time low the previous week. Refinance apps finally saw a positive week, up 11.4% for the week. But most importantly for economic activity, purchase apps rose for an eighth consecutive week, up another 5.3% and 71% over the past eight weeks.
CPI Inflation Shows Impact of Pandemic and Containment Efforts: The May CPI inflation report showed slightly softer prices than expected with headline and prices both down 0.1% MoM. The monthly declines brought the YoY rates down from 0.3% to 0.1% and 1.4% to 1.2%, respectively. The outworkings of the pandemic and containment efforts have skewed supply-demand for many categories of goods and services. Energy prices were down another 2.0% MoM as global oil demand remains hampered. Apparel prices fell 2.3% as retailers remain shuttered. Hotel prices fell another 1.5% after falling 7.1% in April and 6.8% in March. Airfare fell another 4.9% after a 15.2% decline in April and a 12.6% drop in March. Alcohol prices rose 0.8% and the price of meat, poultry, fish, and eggs (cumulatively) rose 3.70%. Recreation prices rose 1.3%, the largest monthly increase on record (dating back to only 2010), presumably on the higher price to deliver recreation services. Evidence of this was seen in the 2.2% increase in movie prices. Some of the large prices swings are also the result of difficulty in measuring prices when very few transactions are taking place. As such, and given the presumably transient nature of the lockdowns, Fed officials are unlikely to read too much into any inflation reports in the short-term.
Nasdaq Hit Another Record Despite S&P 500 Falling Back: The broadest measures of U.S. equities struggled Tuesday while the Nasdaq rode recent momentum for tech shares to a second consecutive record close. The S&P 500 saw eight of its 11 sectors retreat Tuesday with some of the recent winners, such as energy, industrials, and financials, all posting poor performances. Yesterday’s 0.8% decline dragged the index back into negative territory for 2020. Tech companies swam upstream to a solid finish that pushed the Nasdaq up 0.3% and to a new all-time high. Investors have cheered signs of some economic recovery, such as yesterday’s small bounce for small business confidence, even though activity remains notably depressed relative to its pre-pandemic pace.
Yields Fell Amid a Loss of Risk Appetite: In addition to the economy reopening, risk assets have been further supported by a willingness from officials in Washington, both fiscal and monetary, to keep businesses and workers propped up until some semblance of normalcy returns. Much of today’s market focus will be on the Fed’s updated projections, including officials’ views of the path for the fed funds rate. Markets ended Tuesday priced for no change to the policy rate through 2022. That expectation has helped keep the 2-year yield, which dropped 2.4 bps Tuesday to 0.20%, anchored at a low level. The 10-year yield fell 5.0 bps to 0.83%.
Markets Wait on the Fed: Treasury yields continued to leak lower as investors wait for the Fed’s first official economic and rate projections since December. Global equities treaded water for a second day after positive economic news last week had lifted major indexes around the world Monday to their highest levels since early in the pandemic. Despite some signs of minimal recovery in May, the nature and depth of the recession, which the OECD described on Wednesday as the “most severe recession in nearly a century,” has created an incredible amount of uncertainty for the outlook. How preliminary improvements in May data and a highly uncertain forecast horizon translate in the first post-pandemic Fed projections will drive markets after lunch. After the softer-than-expected CPI report, the 2-year yield had dropped 1.2 bps to 0.19%, the 10-year yield was 2.3 bps lower at 0.80%, and equity futures were modestly positive with the Nasdaq set for another record at the open.
JOLTS Data Confirms Record Labor Market Pain: Job openings tumbled more than expected in April as lockdowns sent available employment opportunities to their lowest level since 2014. Total openings fell 965 thousand to 5.05 million after a 993-thousand drop in March. April’s decline was heavily concentrated in services industries as construction and manufacturing openings recovered slightly after large March declines. Not surprising, new hires declined again and at a quicker rate (1.6 million versus 753 thousand in March) and layoffs remained elevated at 7.7 million, slowing from a stronger 11.5 million surge the month before. While the nonfarm payroll report surveys employment changes near the middle of the month, hires and layoffs from the JOLTS report capture activity for the entire month.