The Market Today
Treasury Yields Rise as NY Fed Bank Walks Back Williams’s “Academic” Advice for “Swift Action”
by Craig Dismuke, Dudley Carter
Consumer Confidence Expected to Improve in the Face of Broader Uncertainty: Another interesting week for economic developments will come to a quiet close today, with a lonely consumer confidence report and remarks from two Fed officials. At 9 a.m. CT, the University of Michigan will announce the preliminary consumer sentiment results for July, which are expected to show modest recoveries in the current assessment and future expectations. As-expected results would lift the headline index up to its second strongest level of the year and near the top end of this cycle’s range.
At 10:10 a.m., St. Louis Fed President Bullard, an outspoken advocate for a couple of rate cuts this year, including one at this month’s meeting, will speak at a research event. Comments yesterday from New York Fed President Williams at the same event, seemingly implying support for a larger rate cut in July, caused quite the stir in U.S. markets and had to be later clarified by a bank spokesperson (more below). Overnight, Bullard was quoted by the WSJ as saying, “I guess I would listen to arguments along that line [for a 50-bps cut], but at least sitting here today, I just don’t think the situation really calls for that aggressive of a move.” At 3:30 p.m., Boston Fed President Rosengren will join Bank of Japan Governor Kuroda in a panel discussion. These remarks are the last official appearances scheduled before the Fed enters the quiet period leading up to the July meeting.
Yesterday – Markets Raise Probability of a 50-bps Cut in July after Key Fed Officials Support Quick Action: Whether the timing was coincidence or coordinated, dovish commentary from a couple of key U.S. central bankers was the biggest driving force behind Thursday’s drop in yields. Treasury yields rose early after the Philadelphia Fed’s Business Outlook index posted its biggest one-month surge of the cycle, joining a growing list of hard economic data that has firmed up in recent weeks. Those gains dissipated slowly, however, as stocks weakened throughout the morning. Earlier, stocks in Asia and Europe had weakened in response to continued concerns about a trade war and mixed results from the early innings of the corporate earnings season. Market action picked up in the afternoon, with the S&P 500 reversing higher and into positive territory, the Dollar sinking to a new July low, and Treasury yields making new lows on a double dose of dovishness from top Fed officials. Before the ink had dried on extremely dovish headlines from NY Fed President Williams (more below), Fed Vice Chair Clarida said in an unscheduled TV interview that central bankers should act preemptively when they are able (e.g. when inflation is low) and that “you don’t want to wait” to see the actual data turn before you do. Clarida’s comments cemented the yield drop that occurred during Williams’s speech, with both leading to a near doubling of the market probability for a 50-bps cut in two weeks. Fed Funds futures closed pricing in a 65% chance of a 50-bps ease this month, up from 35% on Wednesday. The 2-year yield fell 5.5 bps on the day to 1.76% and the 10-year yield dipped 2.1 bps to 2.02%. The S&P 500 ended up 0.4% after falling as much 0.4% earlier in the day.
Overnight – Treasury Yields Unwind Thursday Drop as NY Fed Bank Walks Back Williams’s “Academic” Advice for “Swift Action”: While U.S. equity futures have added modestly to Thursday’s Fed-induced gains, Treasury yields have unwound a sizeable portion of yesterday’s drop following an evening clarification from the New York Fed about the intentions of a speech earlier in the day from its president. In an incredibly dovish speech yesterday (more below), Fed Bank President Williams said “swift action” was needed when the economy faces deterioration conditions. The comments were taken by markets to signal currently policy may be more deeply adjusted at the Fed’s meeting in two weeks, leading to a repricing of Fed expectations in Fed Funds futures and a rally across the Treasury curve (more above). A spokesperson from the New York bank later clarified, “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.” The probability of a 50-bps cut at this month’s meeting, which had spiked to 65% yesterday, edged back to 40%. Globally stocks trade mixed overnight, stronger in Asia and essentially flat in Europe, while core European yields inched lower on weakness in Italian assets related to political uncertainty. The 2-year Treasury yield was up 4.4 bps at 7:40 with the 10-year yield 2.1 bps higher.
Williams Sounds Support for “Swift Action” in the Face of Uncertainty: NY Fed President John Williams used advice his wife, a professor of nursing, would give to the parent of a new child to explain his current paradigm for the Fed’s monetary policy stance. His wife says the short-term pain of a vaccination shot is clearly worth the benefit of lowering the risk of a destructive disease in the future. Williams drew a parallel to monetary policy, saying “It’s better to take preventative measures than to wait for disaster to unfold.” He highlighted that an outworking of a persistently low-inflation economic environment, a framework-altering phenomenon currently besetting central bankers around the globe, is that interest rates will remain in closer proximity to the zero lower bound (ZLB) than in periods past. Based on a career of studying the neutral rate of interest, r-star in Fed parlance, Williams said conventional monetary policy approaches must be adapted when rates are closer to the ZLB. Directly contradicting the “save-your-powder” argument made by those who support of a 25-bps cut over a 50-bps cut, he advocated, “don’t keep your powder dry, …move more quickly…than you otherwise might. … When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.” He doubled down in the conclusion of his surprisingly dovish speech, saying with rates near the ZLB the Fed should, “take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer.”