The Market Today
Market Optimistic on Coronavirus Containment; Fed Chair Powell to Testify
by Craig Dismuke, Dudley Carter
Fed Chair Powell in Focus with Congressional Testimony: Fed Chair Powell will testify before the House Financial Services Panel at 9:00 a.m. CT today. In the pre-released prepared remarks, Powell said the Fed is “closely monitoring” the virus “which could lead to disruptions in China that spill over to the rest of the global economy.” However, absent a “material reassessment” of the outlook, “the current stance of monetary policy will likely remain appropriate.” Also on the calendar today are Fed Vice Chair Quarles, St. Louis Bank President Bullard, and Minneapolis Bank President Kashkari.
Job Openings: December’s Job Openings and Labor Turnover survey is scheduled for 9:00 a.m. CT. Job openings have pulled back fairly sharply recently despite the continued strength in net number of new hires.
Small Business Optimism Rises, Positive Trend for President Trump: Small business optimism improved more than expected in January, rising from 102.7 to 104.3. Almost every underlying metric showed positive results, including a four-point jump in plans to increase inventories, a seven-point increase in expectations for higher sales, and a five-point improvement in the earnings outlook. Business confidence remains high under President Trump heading into the elections. Of the last six presidents, only President Reagan saw a larger increase in confidence from the previous administration 40 months into their first term. (See Chart of the Day).
New Hampshire: Also on the calendar today is the New Hampshire primary. After Iowa’s results, focus will be on how much Biden’s support erodes, presumably seen in increased votes for Buttegeig.
Stocks Rose Back to Records: U.S. stocks returned to their winning ways Monday following a Friday drop that disrupted the solid global rally that unfolded for most of last week. Last week’s trading dynamics saw ever-increasing virus cases and deaths challenged by stimulus from China’s central bank and three key U.S. economic reports – January’s ISM surveys and BLS payroll report – that exceeded expectations. While global equities mostly slumped overnight ahead of U.S. trading, U.S. equities quickly erased an opening drop and climbed to close near the highs of the day. The S&P 500 gained 0.7% while the Nasdaq outperformed with a 1.1% jump, both ending at new records. The Dow rose 0.6% but closed shy of last week’s all-time high. Within the S&P 500, energy companies were the only sector to stall out as oil prices slumped, with WTI closing back in a bear market below $50 per barrel.
Yields Held Lower Amid Continued Uncertainty: The continued uncertainty evident in oil markets also kept downward pressure on global yields. Consistent with lower yields in Europe, Treasury yields dropped to shave 0.8 bps off the 2-year yield and 1.4 bps of the 10-year yield. With the two securities ending the day at 1.39% and 1.57%, respectively, both finished inverted to the effective Fed Funds rate just below 1.60%. The recent rally in the price of Treasury securities has quietly caused the Treasury curve from ten years and in to fall back below the average execution level for Fed Funds transactions, adding another element of complexity and uncertainty related to the coronavirus worries. China’s official update to the virus statistics from weekend activity showed the case number crossed 40,000 and the death toll surpassed the final level from the SARs outbreak.
Markets Hope for Coronavirus Containment: After a shaky start on Monday, the tone underlying global markets has firmed up Tuesday to lift global shares and push global sovereign yields higher. Oil prices also recovered Monday’s drop and the price of gold softened with the safe haven Japanese yen. Investors have sanguinely bid up risk asset valuations since last Monday even as the number of cases and deaths tied to the coronavirus continued to climb, leading many to reduce estimates for Chinese and global economic growth. The seemingly stubborn risk appetite is at least partially tied to hopes the slowing pace of new cases could signal that the drastic measures taken by the Chinese government may have been effective in preventing an even worse outbreak.
Powell Set to Say the Fed is “Closely Monitoring” Coronavirus: Stocks were exclusively higher in Asia and Europe where broad measures rose 0.9% and 0.7%, respectively, while U.S. futures were higher by 0.3% at 7 a.m. CT. At the same time, Treasury yields were leading a modest move higher in global yield and had unwound Monday’s tick lower. The 2-year and 10-year yields were both up around 2 bps after the solid read on business optimism and ahead of Fed Chair Powell’s remarks before the House Financial Services Panel. While the stock market has signaled a relatively quick end to the coronavirus disruption, Fed Funds futures continue to price in at least one rate cut this year because of continued uncertainty.
Fed’s Daly Favors Above-Target Inflation: Capturing the spirit behind the Fed’s ongoing framework review, San Francisco Fed President Daly said she has learned as part of that review that, “A historically low unemployment rate does not mean that the labor market is historically tight.” Because of this and other aspects of a new normal economic environment that will likely be prone to lower interest rates, central bankers “need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target.” And while she believes the Fed has the tools to achieve their desired outcome, she also noted those tools are more “limited” than in the past and therefore “fiscal policy will need to play a larger role in smoothing through economic shocks.”
Fed’s Harker Says Hold: Pushing back against the idea that economic uncertainty, which has risen significantly with the spread of the coronavirus, could quickly force the Fed from the policy sidelines, Philadelphia Fed President Harker said the economy is “in good shape.” Addressing the factor that markets are most focused on, Harker, who votes on policy this year, said, “It’s too early to say what impact the spread of the coronavirus will have,” but called it “something to watch.” Under his current baseline forecast, Harker expects U.S. growth around 2% this year thanks to solid consumer spending, the product of a healthy labor market, that should offset a weaker business sector, which has been beleaguered by uncertainty. The net effect for rates, Harker concluded, is that the Fed “should hold steady for a while and watch how developments and the data unfold before taking any more action.”