Summary and Price Action Rundown
US equities slipped from yesterday’s new record highs as Fed minutes painted a grim picture of the recovery, while the lack of details on upcoming monetary stimulus backed up Treasury yields and the dollar. The S&P 500 declined 0.4% today, paring its year-to-date gain at 4.5% and retreating from its all-time high. Equities in the EU and Asia were broadly mixed. The dollar bounced from its recent multi-year trough, while longer-dated Treasury yields edged higher, with the 10-year yield closing at 0.68%. Today’s OPEC meeting failed to boost Brent crude, which dipped back toward $45 per barrel.
Dour Tone of Fed Minutes Weighs on Sentiment
Scant details on the upcoming policy shift provided little positive offset for the Fed’s downbeat assessment of the economic recovery outlook. Stocks turned lower, Treasury yields edged higher, and the dollar popped from over two-year lows after minutes from the Federal Reserve’s last meeting on July 28-29 suggested that an expected shift to a more dovish “enhanced guidance” formulation may not occur at the September meeting as expected. For context, so-called enhanced guidance would more formally link interest rate policies and asset purchase programs to the existing 2% inflation target and full employment mandate. Meanwhile, Fed staff lowered their growth forecast and expect the rate of recovery in GDP and the pace of declines in the unemployment rate to be “somewhat less robust than in the previous forecast.” Furthermore, FOMC members “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term.” Therefore, the FOMC expects to hold the current overnight borrowing rate to a range of 0%-0.25% until they are “confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.” While there was agreement that Fed policy should remain extremely accommodative for the foreseeable future, officials continued to voice skepticism about the usefulness of using bond purchases for purposes of yield curve control.
Republicans Retest Narrower Version of Pandemic Relief
House Speaker Pelosi has rejected previous attempts to take a piecemeal approach to the latest stimulus bill but with the stalemate continuing, Senate Republicans are revisiting this approach. As stimulus negotiations between White House officials and Democratic Leadership remain stalled, Senate Republicans are preparing the groundwork for a skinny stimulus package at about half of the original $1 trillion HEALS proposal from last month. The new proposal, according to sources, will include $300 weekly federal unemployment benefits through December and establishes liability protection, provides $29 billion in health care funding, $105 billion for schools, and would forgive a $10 billion loan to the US Postal Service. The effort is an attempt at shoring up party unity in the face of several Republican Senators who have been reticent to support any additional fiscal stimulus. Senate Majority Leader McConnell mentioned on a call with lawmakers on Tuesday that the bill will likely not be voted on until after the GOP convention, leaving time to accrue support but also further extending the gap in benefits. Fractures in the Democratic line have also taken shape as several House Democrats have circulated a letter to Speaker Pelosi and Democratic leadership to vote on legislation extending the federal jobless benefits on Saturday, citing the need to continue providing support to the American people who are being impacted by partisan brinksmanship over the bill. The House is scheduled already to vote Saturday on additional funding and protections for the US Postal Service, a point that both WH Chief of Staff Meadows and Treasury Secretary Mnuchin have cited as the first step in Democrats’ willingness to provide more targeted economic support. Meadows stated that if Democrats are willing to help the postal service (an already agreed upon provision from negotiations), then both sides should simply be able to add in things that they agree upon, but it is unclear whether Democrats will accept such an approach.
Additional Themes
Mortgage Bankers Association Reflects Rate Sensitivity – While housing data has been a bright spot in the US economy the last few months, last week saw Treasury rates moved higher which also dragged mortgage rates along with them and saw total mortgage applications fall 3.3% from the previous week according to data from the MBA. The average rate on the popular 30-year mortgage rose from 3.06% to 3.13%. The increase also saw refinance demand drop 5% on the week, however they are still up 38% from last year. New mortgage applications to purchase a home increased 1% for the week but are similarly up 27% annually.
OPEC+ Meeting Offers Little New Support – Crude oil prices dipped modestly today, with Brent crude hovering above $45 per barrel, as the cartel meeting yielded nothing beyond the expected outcome. Saudi and Russia again aligned to push for continued compliance with the agreed levels of supply discipline and compensatory cuts by laggard members like Nigeria and Iraq to cushion the impact of the broader membership tapering their curbs. Meanwhile, the resurgent pandemic is crimping the demand picture, with analysts citing concerns over higher-than-expected estimates of US gasoline inventories. The offsetting supply cuts and weak demand has left oil prices trading in a narrow and sideways range for the past two weeks.