Afternoon Markets Brief 9-17-2020

Summary and Price Action Rundown

US equities gave up early gains today as the Fed decision provided no new upside impetus and tech underperformance reemerged, while investors monitored fiscal stimulus headlines and soft retail data. The S&P 500 lost 0.5% today, retracing yesterday’s upside and paring its year-to-date gain to 4.8%, which is around 5.5% below early September’s record high. The tech-heavy Nasdaq also erased yesterday’s 1.2% gain, taking its robust year-to-date gains to 23.2%. Equities in the EU closed slightly higher while Asian stocks were mixed overnight. The dollar bounced from intraday lows after the Fed declined to adopt the more dovish policy formulation that some analysts had expected, while longer-dated Treasury yields edged higher, with the 10-year yield closing at 0.70%. Brent crude prices rebounded above $42 per barrel as US inventories shrank.

Fed Decision Meets Expectations

Despite increasingly accommodating guidance from the Fed today, the FOMC declined to enact the most dovish potential formulation predicted by some analysts. In today’s decision, the FOMC unsurprisingly left interest rates unchanged at 0-0.25% and projected that it would maintain this ultra-low rate range through at least 2023 in order to facilitate the US economy recovery from the fallout of the coronavirus pandemic. Specifically, the accompanying statement stated that this accommodative rate would likely be maintained “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” Dallas Fed President Kaplan dissented in favor of a more flexible formulation, allowing for more proactive monetary tightening, while Minneapolis Fed President Kashkari expressed his preference to steer policy toward 2% inflation “on a sustained basis.” The statement also reiterated a commitment to continue buying Treasuries and mortgage backed securities at least at the current pace of $80 billion and $40 billion, respectively, over “coming months.” The Fed also updated its Summary of Economic Projections, expecting the unemployment rate by year’s end to average 7.6%, compared to the June projection of 9.3% and the current 8.4% rate. Officials revised growth projections to -3.7% from the prior -6.5% estimate for 2020 but to 4% for 2021, a slower rate than the previous 5% outlook. In his press conference, Chair Powell declined to invoke “enhanced guidance,” an even more accommodative formulation that would more formally tie policy decisions to inflation and unemployment targets. He did mention that the Main Street Lending Program, which has now deployed $2 billion of its $600 billion total firepower, is being tweaked in an effort to improve uptake. – MPP view: The Fed met our expectation that it would shy away from fully embracing enhanced guidance today, meaning they would not directly link policy action on rates and asset purchases to specific inflation and employment benchmarks. But they indeed used the dot plot and strong messaging to hammer home their deep commitment to maintaining ultra-accommodative policy settings for the foreseeable future. Overall, we thought this decision would not amount to a hawkish surprise but will not be as wildly dovish as it could have been, which seems about right. Overall, the market reactions comported with this view, though Treasury yield curve slightly steepened, which we did not expect.


More Encouraging Atmospherics Around the Pandemic Relief Bill

Developments continue to suggest renewed momentum toward a deal on further fiscal support. Chief of Staff Meadows, who has been cited by Washington insiders as taking a hard line in negotiations on this stimulus bill, indicated that President Trump is favorably disposed toward the compromise $1.52 trillion proposal put forward yesterday by the House “Problem Solvers Caucus,” a group of 50 centrist Representatives. This package would include $120 billion for unemployment assistance at $450/week in mid-October and then $600/week from December through January 2021, a second round of stimulus checks, about $500 billion in state aid, and liability protections for employers. This follows Speaker Pelosi’s statement on CNBC yesterday vowing that the House will not go into recess for the November election until an additional round of stimulus is passed. On Monday, Treasury Secretary Mnuchin had urged action on economic stimulus during his appearance on CNBC and downplayed concerns over the size of the deficit. Still, House Democratic leadership, while citing progress, suggested that they might hold out for a higher number, calling the size of the compromise bill “insufficient,” while Senate Republicans expressed mixed sentiments and concern over the magnitude of spending. Meanwhile, late afternoon reports indicated that House Republicans are pushing to expedite a bill that would redeploy remaining money in the Paycheck Protection Program. – MPP view: We have been out of consensus in thinking the odds of an agreement on this relief bill before month-end are relatively high, and viewed this $1.5 trillion proposal is a formulation that enough lawmakers and the White House can get behind. The White House seems on board, and we continue to expect a deal around this basic framework to be agreed before the pre-election Congressional recess.

Additional Themes

US Retail Sales Undershoot – Retail sales for the month of August disappointed, rising 0.6% after the downward revision of July’s number to 0.9% and missing the consensus forecast of a 1.0% increase. The deceleration of retail sales over recent months has been blamed on the expiration of federal unemployment benefits, the drying up of support for small businesses, and the persistence of the pandemic. Meanwhile, core retail sales, which most closely track the consumer spending component of GDP, fell 0.1% in August. While sales continue to rise for areas such as food and drink (4.7%), clothing (2.9%), and furniture (2.1%), more areas are starting to see significant reversals such as department stores (-2.3%), grocery stores (-1.6%), and sporting goods and hobby (-5.7%). Most analysts point to August’s data as a forerunner to the economic damage likely to result absent a significant stimulus package from Congress. The dramatic rebounds in May and June that have since tapered off over previous months were attributed heavily to both pent-up demand upon phased reopening of the economy and the CARES Act, which bolstered US consumer spending. The backsliding in retail sales comports with the warnings of many economists and Fed officials and may rekindle greater urgency on Capitol Hill to pass the next stimulus bill.

Rate Sensitivity in Mortgage Markets – According to the Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey, last week’s applications fell 2.5% from the week ending on September 11th, after rising 2.9% the previous week. The Refinance Index decreased 4% since last week, though is still 30% higher from the same week a year ago. The seasonally adjusted Purchase Index also dropped 1% from and the unadjusted Purchase Index fell 12%, yet has remained 6% above last year’s figure. Even with elevated refinance activity reported over the past several months, Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, blames slowing demand on “remaining borrowers in the market potentially [waiting] for another sizable drop in rates.” The average interest rate for fixed 30-year mortgages has remained unchanged at 3.07%, 1-basis point above the record low, and average loan size continued to inflate, hitting a new survey high of $370,200. While this week’s data showed falling applications, the underlying trends remain strong. Purchase activity has outpaced last year’s levels for 17 consecutive weeks. Record low rates and a limited housing supply continue to underpin a prosperous housing market. In a separate report released this morning, the NAHB housing market index jumped 5 points to 83 in September, beating market projections of 78. The climbing figure registered a new record high for the survey’s 35-year history, driven by the low rate environment and a flurry people leaving big cities amid the pandemic.

Afternoon Markets Brief 7-27-2020

Summary and Price Action Rundown

US equities resumed their tech-led uptrend today ahead of key earnings releases later this week, the dollar’s ongoing downtrend accelerated, and investors continued to monitor signals from negotiations on Capitol Hill over the next pandemic relief bill. The S&P 500 retraced Friday’s downside to edge back into positive territory year-to-date but remained shy of last Wednesday’s peak for the pandemic. The tech-heavy Nasdaq erased last week’s rare underperformance. Equities in the EU and Asia were mixed. Longer-dated Treasury yields moved above March lows, with the 10-year yield at 0.62%, while more upbeat EU data lifted the euro and sent the dollar to a new multi-month low. Brent crude fluctuated above $43 per barrel.

Details Awaited on Senate Republican Stimulus Bill

Negotiations are set to heat up over the draft bill being crafted by Senate Leader McConnell. Republicans most notably have ramped up their rhetoric on cutting the soon-to-expire $600/week benefits down to a sliding scale of 70% of previous wages earned. The 70% payment scheme, according to several estimates, would take anywhere from two to five months to roll out as states will face significant difficulties in implementation compared to the flat rates previously used. Republican leaders have addressed the issue by suggesting a $200/week flat payment while states work on adjusting. This proposal is likely to be the main point of contention between the parties as Speaker Pelosi has made clear her intention of defending the $600 payments through the end of the year. Other provisions include liability protections for hospitals, schools, and nonprofits, $105 billion allocated towards school reopening, $16 billion for enhanced testing measures, a second round of the Payroll Protection Program (PPP) targeted at SMEs that have seen 50% or greater falls in revenue, according to Treasury Secretary Mnuchin, and the proposal to issue another set of $1200 direct payments to individuals and families. Friday’s CNN interview with Larry Kudlow also confirmed a plan to lengthen the period of the federal eviction moratorium that is set to expire.

Senate Minority Leader Schumer lambasted the previously-reported provisions as inadequate, failing to effectively cover issues ranging from rental assistance to state and local government funding, points that are staunchly defended in the Democrat’s previous HEROES Act proposal that passed in May. Where the GOP plan reports only loosening guidelines on spending previous CARES Act funding for states and localities, with no new added stimulus, the Democrats originally proposed nearly $1 trillion in spending to plug budget gaps from emergency relief spending and lost tax revenues.

Given the likelihood that negotiations will drag further into August than hoped, White House officials have already begun pushing a “skinny” version of stimulus, with both Chief of Staff Meadows and Secretary Mnuchin on Sunday news shows advocating a narrow focus on unemployment benefits while kicking future decisions down the road to a possible September stimulus. A narrow package has been labeled unacceptable by Democrats who claim the provisions are necessarily linked to each other, claiming that passing certain provisions will extend benefits to some while leaving others to fall through the cracks unaddressed. – MPP view: With the July 31st deadline for enhanced unemployment benefits approaching, debates over the coming week will likely push Republicans towards the bargaining table as a “no deal” scenario is politically unacceptable and it is widely understood that the bill will increase from the first draft $1 trillion anyway.


Stocks Rise Ahead of Earnings Barrage

Going into the busiest stretch of second quarter (Q2) earnings season and key releases from IT giants, stocks marched higher with tech again taking the lead. With last week marking the first third of S&P 500 companies to report Q2 earnings, analysts are still groping for consistent themes heading into this week’s major lineup of reporters. With 129 of S&P 500 companies having reported, 84.9% of results have featured a positive earnings-per-share (EPS) surprise and 67.4% have topped revenue estimates. Both percentages place higher than their respective five-year averages. Tomorrow, Visa, Pfizer, McDonald’s, 3M, Starbucks, AMD, Chubb, eBay, Aflac, and DR Horton report. Analysts will be focused on Visa’s payments volume since in May, as total US payments volume slumped 5% y/y. With shelter-in-place restrictions beginning to relax later in Q2, it is likely this will be reflected on payments volume, offsetting lagging cross-border revenues. AMD will fight to keep its recent price action hot-streak alive from Friday after Intel’s disappointing report last week disclosed that the company is looking to outsource its chip production to competitors like AMD. Chubb traded 1.9% lower amid expectations that, given the pandemic, the company has less growth in travel insurance, accident & health discretionary purchases, automobile insurance, and commercial lines of business. Lastly, DR Horton saw a significant 4.4% rise in share price today as analysts are expecting an earnings beat after estimates were recently revised upwards, which is usually an accurate indication of favorable trends for the company.  

Additional Themes

US June Data Remains Strong – New orders for key US-made capital goods increased by the most in nearly two years in June and shipments accelerated driven by pent-up demand following the reopening of businesses. New orders for US manufactured durable goods rose 7.3% from the previous month in June, following a downwardly revised 15.1% jump in May and beating market forecasts of 7%. Demand for transportation equipment jumped 20%, mainly due to motor vehicles and parts (85.7%) while defense aircrafts and parts plunged 30.6%. Excluding transportation, new orders increased 3.3% and excluding defense, new orders increased 9.2%. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 3.3% after a 1.6% gain in May. Core capital goods orders were hit much less hard by Covid-19 than by the crash of 2008 and the subsequent credit crunch. Moreover, the bulk of the hit to second-quarter gross domestic product was in consumption—not capital spending. – MPP view: Backward-looking June data is being discounted, and rightly so. The dollar took a beating today, as more upbeat EU data (see below) sent the euro to a new 2020 high and its strongest level in two years. 

German Business Gauge Points to Continued Rebound – The Ifo Business Climate indicator for Germany rose by 4.2 points from the previous month to a five-month high of 90.5 in July, recovering further from an all-time low reached in April and beating market expectations 89.3. The services component index rose from -6.0 to 2.0, positive for the first time since February. The gauge indicating firms’ projections for the next six months came in at 97.0 for July, up from the previous month’s 91.4 reading and better than market expectations of 93.7 following the easing of the coronavirus-induced lockdown. In the entire month of July, the country of 83 million has had less than 10,000 new coronavirus infections.

Afternoon Markets Brief 5-12-2020

Summary and Price Action Rundown

US stocks retreated today as closely-followed testimony by Dr. Fauci emphasized the risks of a premature economic reopening. The S&P 500 accelerated to the downside into the close of trading, ultimately falling 2.1% on the day to deepen year-to-date downside to 11.2% and the decline from February’s record high to 15.2%. Equities in the EU and Asia were more upbeat but generally directionless. Longer-dated Treasury yields reversed much of their recent upside, with the 10-year yield sinking to 0.66%. The dollar gained slightly and remains within a tightening trading range. Crude oil fluctuated around three-week highs.


Investor Continue to Grapple with Uncertainty Over Economic Reopening

Today’s virtual Senate testimony by self-quarantined White House coronavirus advisor Dr. Fauci highlighted the challenges of reopening the economy. Dr. Fauci sounded a cautious note in his testimony today, warning that restarting economic activity before important containment benchmarks are achieved carries the “real risk” of widening outbreaks that reverse progress toward recovery. With investors refocusing on the risks of secondary infection spikes and re-imposed lockdowns, US equities retraced a portion of their recent rally today. Meanwhile, the marked divergence in performance among “winners” from the pandemic, like health care and IT stocks, and “losers,” like banks and industrials, was less apparent today as all sectors posted meaningful losses. Treasury markets, meanwhile, remain consistent with a lengthy economic trough, though fed fund futures have not reverted to negative territory in December and January contracts after a series of FOMC officials have downplayed the likelihood that policy rates would be cut below zero (more below). – MPP view: Our base case has been for an unfortunately long tail for this pandemic, with an uneven and challenging reopening process. We have been skeptical that extreme IT/healthcare sector outperformance can continue to drag the S&P 500 higher, but nevertheless have been impressed by the relative buoyance of US equities over recent weeks despite the apparently thin justification for optimism, the lack of upside validation from Treasury, credit, and commodities markets, and the scant likelihood of a V-shaped recovery. 

Economic Pain Spurs Efforts Toward Another Pandemic Relief Bill

House Democrats are readying the latest fiscal support package for the economy as data continues to highlight the depths of the pandemic-related contraction. This afternoon, House Democrats released a draft version of the latest Covid-19 relief bill totaling $3 trillion, which is set to go to the House Rules committee on Thursday in preparation for a vote on Friday. For context, the so-called Heroes Act features $1 trillion in support for states and municipalities, money for Covid-19 testing, direct payments to households of up to $6000, and surpasses the size of its predecessor, the $2.2 trillion CARES Act, which was signed into law in March. Republicans in the House are set to oppose the relief bill while Senate Republicans are said to be split, with Majority Leader McConnell calling instead for “narrowly-targeted legislation.” The White House has sent mixed signals on this latest round, with President Trump today referencing the potential for a second round of stimulus payments to households.

These efforts come amid more depressed US economic data ahead of closely-watched April retail sales and industrial production data, which is due on Friday. Today’s release of the headline consumer price index (CPI) showed a decline of 0.8% month-on-month (m/m) in April, the most since December 2008, as gasoline prices plunged 20.6%. This leaves the CPI up a mere 0.3% year-on-year (y/y), the lowest level since 2015. While energy prices plunged last month, the cost of food at home surged 2.6% m/m, the most since 1974, as Americans stocked up at grocery stores. Prices for bread, chicken, carbonated drinks, and snacks all posted record increases, as did household paper products. Meanwhile, Core CPI, which excludes the more volatile food and fuel prices, fell 0.4% m/m, following a 0.1% decrease in March, which was the steepest decrease since 1957. This dropped the Core Index to 1.4% y/y after it rose 2.1% in March.

Meanwhile, small business confidence took another hit in April as the NFIB Small Business Optimism Index fell 5.5 points to 90.9, down from 104.5 in February. Owners expect the economy will weaken in the near-term and saw sales expectations plummet 30 points to -42. However, there is optimism that the recovery will be “V” shaped as business conditions expectations over the next six months erased the entirety of the decline seen in March. As many states are beginning the process of easing stay-at-home restrictions, both investors and business will be paying close attention to daily infection rates across the US and globe to see if this optimism is based in the reality of the virus. – MPP view: The ongoing US equity rally has (at least in part) been premised on expectations of continued stimulus, but the strength of the rally has made continued stimulus less likely. Rightly or wrongly, policymakers respond to signals from equities and we think the soaring stock market has contributed to a sense of complacency in some quarters on Capitol Hill.

Additional Themes

US-China Tensions Rising but Still Restrained – Despite last week’s improving atmospherics in the trade relationship, friction between China and the US, as well as some of its allies, has continued rising this week. President Trump ordered the federal thrift savings plan (TSP) for federal employees to halt investments in Chinese stocks, valued at $4.5 billion, yesterday. The action is in line with a hardening White House stance against China premised on charges of malfeasance in Beijing’s handling the initial outbreak. Chinese shares evidenced little reaction to the move, but Asian equity futures remained choppy amid pandemic-related concerns. President Trump’s TSP move has received bipartisan support but do not represent the extent of American investment in Chinese securities. Governor Newsom has also been subject to calls from federal legislators to divest his state’s largest public pension fund, CALPers, from its $3.1 billion of Chinese assets, but has not responded publicly. State pension funds in the United States have invested over $300 billion in Chinese assets. These funds’ divestment policies are currently at the discretion of their respective governors. Still, the federal divestment is one more component in escalating hawkishness from the administration.

Meanwhile, Australian stocks fell but and the Aussie dollar dipped after China suspended a significant portion of beef imports, a decision that may be tied to a spat over the pandemic.  

More Fed Officials Talk Down NIRP – Today, St. Louis Fed President Bullard and Dallas Fed President Kaplan both downplayed the potential for the FOMC to adopt a negative interest rate policy (NIRP), sentiments echoed by Minneapolis Fed President Kashkari, although he declined to rule out the policy entirely. This comes after yesterday’s remarks from Chicago Fed President Evans and Atlanta Fed President Bostic also expressed skepticism over the appropriateness of NIRP. Correspondingly, fed fund futures have shifted out of negative territory on the late 2020/early 2021 contracts. Analysts expected Fed Chair Powell to mirror his colleagues’ skepticism on NIRP in his remarks on tomorrow. Meanwhile, the New York Fed announced yesterday that it will begin to buy corporate credit, some of it below investment grade, though exchange-traded funds (ETFs). Reports suggest an initial amount of $250 billion among the Fed’s overall purchase programs will be allocated to corporate credit ETFs.

Afternoon Markets Brief 4-13-2020

Summary and Price Action Rundown

US equities retraced a portion of their steep gains of last week, as investors digest the recent barrage of fiscal and monetary support, the OPEC+ deal, and mixed public health data while awaiting corporate earnings reports. The S&P 500 slipped 1.0% today, shaving its historic rebound of 12.1% last week, putting year-to-date downside for the index at 14.5% and the decline from February’s record high at 18.4%. Last month’s acute volatility has subsided somewhat amid supportive monetary and fiscal policy measures, with bouncing oil prices also lifting sentiment, although uncertainty over pandemic containment and economic recovery prospects persist. EU stock markets remain closed for a holiday and Asian equities were mixed overnight. Treasury yields edged higher, with the 10-year yield at 0.77%. Importantly, the dollar continued to slide below its mid-March multi-year peak. Meanwhile, oil prices remained supported as global leaders talked up the OPEC+ decision (more below).

Earnings Season Set to Begin with Investors Bracing for Downside and Uncertainty

Investors are understandably cautious about first quarter (Q1) corporate results as they await details from management on the depth of the current contraction and plans for navigating what is likely to be a tricky recovery. Earnings reporting season kicks off tomorrow in earnest with some major banks and corporate bellwethers reporting, including JPMorgan, Wells Fargo, Johnson & Johnson, and Fastenal. Most major US financials will report throughout the remainder of the week, including Bank of America, BlackRock, Goldman Sachs, and Citigroup. Analysts anticipate choppy figures and high uncertainty regarding managements’ outlook for coming quarters. Overall Q1 earnings growth for S&P 500 companies has been slashed from 4.4% coming into this year to -5.4% versus Q1 last year. Energy companies have seen the largest downgrades, along with industrials and consumer discretionary. As with economic data, the outlook for an earnings rebound in late Q2 and Q3 will likely be more impactful of stock prices than Q1 misses or the depths of the second quarter trough, though visibility on any forecasts will be low. – MPP view: Our view is that stock price reactions to Q1 earnings will probably be relatively more dependent on the background atmospherics of the market, which depend in large part on the public health data coming out over the coming week, as well as the state of the debate on reopening the economy (more below).

Oil Prices Continue Higher as the White House Talks Up the OPEC+ Deal

Brent crude fluctuated near its highest level in nearly a month after OPEC, Russia, and other major oil producers agreed to historic production curbs over the weekend, but some analysts still forecast continued oversupply. After revisiting nearly two-decade lows in late March, international benchmark Brent crude and US benchmark WTI prices have staged a choppy uptrend over the past week as traders have weighed production cuts versus crashing demand. After Thursday’s virtual meeting, OPEC, Russia, and other major producers (collectively known as OPEC+) cut a deal to reduce supply by 9.7 million barrels per day over the next two months, with Russia and Saudi agreeing to match each other’s reduced production levels. Mexico held out but eventually agreed to a more modest supply cut than their peers. Saudi also hosted talks with G-20 energy ministers over the weekend, which resulted in the US, Brazil, and Canada acknowledging output declines, though these are characterized as distinct from OPEC’s voluntary reductions. Today, President Trump and Saudi officials suggested that the cuts, combined with filling petroleum reserves, the total effective supply reductions/diversions will be nearly 20 million barrels per day. Still, analysts question whether even these large production cuts can balance the dramatically oversupplied oil market, which has seen demand collapse amid the coronavirus pandemic. – MPP view: Durable stabilization of oil prices would be a win (so far so good), and there is no reason not to jawbone crude prices higher. We’ll see what Texas comes up with in the next few days as they discuss curbs for the shale patch, which would be a welcome surprise, but isn’t likely.

Additional Themes

Debate Over Reopening the Economy Heats Up – President Trump asserted the right of the federal government to declare a reopening of businesses and schools across the US but state governors who responded tended to differ with this assessment. Governors of Washington, California, and Oregon announced that they would be teaming up to jointly strategize about restarting more normal levels of economic, educational, and social activities, as did the governors of New York, New Jersey, Pennsylvania, Delaware, Connecticut, and Rhode Island. Frameworks for reopening will be rolled out over the coming days. This comes amid speculation that Dr. Fauci, who has been a leader of the White House’s Covid-19 task force, may be facing dismissal. The White House denied this speculation and Dr. Fauci today noted that activities could resume “in some ways” in May. Meanwhile, in Europe, the EU Commission is said to be pushing for coordination across its member states on the timing and procedures for restarting the regional economy. – MPP view: Data needs to help inform the policy decisions about relaxing some of the lockdown measures currently in place. Experience overseas shows that a secondary spike in infections is a substantial risk, even where symptom tracking and contact tracing is far more unified and rigorous than it is in the US.

Airline Stocks Relapse Amid Bailout Wrangle – As Treasury Secretary Mnuchin and US airline heads debate the requirements of federal funding support, investors sold the stocks of the carriers today to the tune of 5-8% losses, reversing a modest rally in the sector. Mnuchin is pushing for 30% repayment of the grants within five years and has insisted that this is not a bailout.

Afternoon Markets Brief 3-16-2020

Summary and Price Action Rundown

Major US equity benchmarks plunged today, erasing Friday’s outsized gains and extending losses deeper into “bear market” territory, defined as a 20% drop from recent highs, as investors assessed the mixed impact of forceful Fed liquidity operations and braced for a sweeping solvency crisis as the US and global economy grinds to a halt. The S&P 500 crashed 12.0% today, tripping another “circuit breaker” trading halt in the morning and posting its worst loss since “Black Monday” in 1987. This retraced Friday’s huge countertrend 9.3% rally that followed Thursday’s plunge of 9.5%. Amid these wild swings, the index is down 26.1% on the year, and 29.5% below its mid-February record high, as investors come to grips with the unprecedented ramifications of the pandemic and question the potential for government measures to counterbalance the multifaceted economic and financial fallout. Equities in Asia and the EU posted more moderate losses. Fed rate cuts over the weekend and acute risk aversion sent Treasury yields lower, with the 10-year yield closing at 0.74%, while the dollar edged back toward multi-year highs. Meanwhile, oil prices continued their swoon, with international benchmark Brent crude losing nearly 13% to sink below $30 per barrel.

Global Financial Markets Relapse Despite Powerful Fed Easing

Although the US public health and economic policy response to the pandemic has become increasingly energetic over the past week, the intensifying magnitude of the economic shock required to slow the contagion has forced investors to contemplate potentially severe economic and personal hardship over the coming months. More disorderly price action today has put the spotlight back on the Fed, the Trump administration, and Congress as investors ponder what measures beyond those already enacted might quell the panic. Some analysts cited President Trump’s indication that countermeasures against the virus could last into late summer months as adding to the pessimism, although others noted that policymakers need to level with the public about the outlook, no matter how dire. Travel restrictions and quarantines continued to tighten in the US and overseas, with increasing numbers of cities and states ordering restaurants, cafes, and bars to close. Meanwhile, the Senate is continuing to amend the emergency bill passed by the House last week, in cooperation with the Trump administration, as investors await details and the IMF announced that it would allocate up to $1 trillion to fight the impact of the outbreak. Though analysts continue to point to fiscal policy as the most appropriate form of stimulus to confront this crisis, monetary easing is becoming increasingly aggressive. Last evening, the Fed executed a surprise 100 basis point (bps) rate cut and announced a $700 billion quantitative easing program, alongside other measures to boost dollar liquidity in the US and overseas. But with this huge magnitude of monetary accommodation failing to steady market nerves, skeptical analysts are pointing to the inability of liquidity measures to address the economic reality that broad swaths of the US economy, businesses and workers alike, will need direct financial support from the government to make it through the coming weeks and months. – MPP view: We have suggested that the $8bn US fiscal package to fund the Covid-19 response is likely to be a down payment / first installment / foot in the door that would lead to more (possibly much more) fiscal spending to fight the virus, support industries, etc., and expected that the next tranche would top $150 billion, whatever form it takes. We also anticipated that reservations expressed by some administration officials and Congressional leaders over larger and broader fiscal stimulus would fade in the face of the worsening human and economic costs of the outbreak and rising systemic market stresses. We believe that the exceptionally adverse market reactions are helping spur necessary action, and Senator Schumer is upping the ante with calls for a $750 billion emergency spending bill.

Despite Strenuous Fed Accommodation, Signs of Heightened Systemic Stress Persist

Though the Federal Reserve has enacted major liquidity programs, significant fundamental strains remain evident in global financial markets, drawing comparisons with the global financial crisis. Analysts have monitoring significant and rising pressure in short-term funding markets (which first emerged in September), overseas dollar liquidity, credit market metrics, commercial paper markets, and interbank funding. For context, systemic risks, like those that manifested themselves in the global financial crisis in 2008, involve threats to the functionality of markets, availability of liquidity, and creditworthiness of companies and banks as opposed to standard market stress, which results in sometimes deeply adverse, but still orderly, price action. The Fed’s actions on Friday and over the weekend appear to have had a positive effect on US short-term funding markets, although repo rates remain choppy, though overseas dollar liquidity gauges have worsened further. Credit markets, however, remain consistent with a broad and worsening solvency crisis, particularly in some of the most impacted sectors, like energy, which is suffering further damage from the Saudi versus Russia oil price war. The commercial paper (CP) market is also experiencing continued stress, with some analysts suggesting that the Fed should begin to directly purchase CP in an effort to unfreeze this key source of corporate funding. EU financials, a perennial weak link in the global systemic risk chain, are also evidencing increasing credit pressure, as the cost to insure against default of European subordinated bank debt reaches levels last seen in 2012. – MPP view: The Fed continues to battle the acute liquidity strains on various fronts, and we do not doubt that it has the tools to address these shortages, both here and abroad. However, the continually worsening outlook for a severe economic impact from pandemic has forced market participants to confront the likelihood of a major, multi-sector corporate and household solvency crisis over the coming months. We had hoped that the market panic over the looming solvency risks could be temporarily stalled by Fed liquidity operations and promises for more coordinated fiscal and monetary action, but it appears that market participants are demanding more clarity, if not outright action, on direct government financial support to impacted industries and workers.

Additional Themes

Increasingly Severe Economic Impact of the Pandemic – Investors are now expecting a global recession or something even worse given the intensifying and unprecedented economic fallout from the epidemic. Over the weekend, China’s January-February economic releases were deeply negative. Industrial production fell 13.5% year-on-year while retail sales and fixed asset investment cratered 20.5% and 24.5%. And while US data has only evidenced a minor impact of the outbreak thus far, the New York region manufacturing activity gauge for March crashed from 12.9 to -21.5, its worst level since 2009, providing a grim harbinger of the economic damage to come. Tomorrow’s retail sales and industrial production numbers for February are expected to remain steady before almost certainly succumbing to steep contraction this month. Goldman Sachs has joined other economists in forecasting stagnant growth in the first quarter (1Q) and a steep contraction in 2Q.

 US Airlines Request Government Support – With Trump administration officials already expressing an openness to supporting US airlines, the industry trade group has put forth a suggestion for up to $58 billion in aid of various kind, including tax rebates and grants. Airline stocks moderately outperformed the broader S&P 500 today but have suffered outsized year-to-date losses between 40% and 60% for the major US carriers.

Afternoon Markets Brief 3-4-2020

Summary and Price Action Rundown

US equities posted significant gains for the second time this week as global central banks and governments redoubled their commitment to coordinated stimulus after yesterday’s false start, while investors also pointed to easing US political uncertainty. The S&P 500 soared 4.2%, nearly matching Monday’s 4.6% rebound and negating yesterday’s 2.8% loss, as investor optimism over coordinated global stimulus measures rebounded amid a barrage of official communications and news reports outlining increasingly synchronized and energetic stimulus measures to counterbalance the impact of the coronavirus epidemic. The index is now down 7.6% from mid February’s record high. Overnight, equities in Asia and the EU were posted more moderate gains. Treasuries were mixed, as the 10-year yield popped above 1.00% after touching a record low of 0.90% yesterday, while the 2-year yield continued to fall on building expectations for further Fed easing (more below). The dollar posted modest gains to stabilize below its recent multi-year highs. Brent crude gave up early gains but remained above $51 per barrel as traders anticipate more supply curbs from OPEC. – MPP note: Please listen to a special edition of our podcast, A Conversation on Coronavirus, featuring noted epidemiologist Dr. Christopher Mores. Links available on our website:


Investor Optimism Over Global Stimulus Rebounds Amid Increasing Signs of Coordination

After financial markets registered disappointment with yesterday’s lukewarm G-7 statement and isolated emergency Fed rate cut, global central banks and governments started to get their act together today. With investors focused on prospects for robust and unified action by central banks and governments to mitigate downside risks to the global economy and financial markets from the epidemic, messaging improved today. French President Macron tweeted that he had engaged in a productive discussion with President Trump and that the G-7 leaders were preparing to “coordinate our scientific, health, and economic response” to the virus. This contrasted with yesterday’s G-7 statement, which provided scant reference to any actual coordination, indicating only that each member country would employ “all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.” Regarding fiscal stimulus, the statement merely noted that it could be used “where appropriate,” while central banks “will continue to fulfill their mandates.”

Given that investors are cognizant that already-low interest rates render central bank cuts less impactful, it was important that the emphasis on fiscal stimulus was deepened today. French Finance Minister Le Maire indicated that EU governments must be ready to deploy fiscal stimulus, which will be “more effective” than monetary easing, a view echoed by the Eurogroup Chair Centeno. In the US, Congress is set to approve an $8 billion spending package aimed at countering the outbreak. Nevertheless, expectations for further monetary easing deepened (more below) – MPP view: Yesterday, we predicted that the G-7 would deepen its engagement and coordination going forward but that it would take time. The timeline for stimulus may be shorter than we expected and the fact that it only took them a day to fix the messaging is encouraging. Hopefully execution will be similarly swift, as the worst of the social and economic impact of the virus likely lies in the months and weeks ahead for the EU and US.

Expectations for More Aggressive Policy Easing Overbalance Initial Disappointment

The Fed’s proactive easing yesterday, alongside ongoing accommodation efforts from other global central banks, matched investor expectations but failed to boost sentiment yesterday, but investors have refocused on prospects for even more monetary stimulus. Market participants expressed concern that yesterday morning’s emergency 50 basis point (bps) rate cut by the Fed, its first such intra-meeting cut since the global financial crisis, and Chair Powell’s subsequent press conference failed to steady market sentiment. Analysts pointed to a variety of factors, including the lack of any guidance for further rate cuts or extraordinary stimulus measures, as well as Chair Powell’s clear concern over the potential economic impact of the virus.

Rather than reflecting a policy pause, futures markets shifted the goalposts to price in yet another cut at the March 18 meeting, with around a 60% chance that the FOMC opts for another 50bps reduction at that meeting. Around 75bps of total additional easing is reflected by September. Some analysts project that rate cuts will be accompanied by an increase in liquidity operations, including the transformation of the ongoing asset purchase program into official quantitative easing. This morning’s Fed injection of liquidity into funding markets to meet outsized demand for cash has raised speculation that the FOMC will need to augment its asset purchase efforts.

Meanwhile, Australia’s central bank cut rates yesterday, as did Bank Negara Malaysia, and the Bank of Canada reduced rates by 50bps at its meeting today. The Bank of Japan has been injecting additional liquidity into its markets, the European Central Bank is expected to cut rates at their meeting next week, and the Bank of England (BoE) has pledged “powerful and timely” support, with analysts anticipating an emergency BoE rate cut. – MPP view: We have expected the Fed to be responsive to the impact of the epidemic but we worried that there may be a critical lag in their response due to general policy inertia and specific concerns about making major monetary policy moves in an election year.

We noted yesterday that the Fed cuts should be made at an emergency meeting this week and ought to be accompanied by signals that quantitative easing (QE) will be deployed if necessary in order maximize that odds of durably calming investor nerves, steepening the Treasury yield curve, and capping dollar appreciation. The omission of any reference to the potential for extraordinary easing measures like QE, we believe, was a significant factor in the adverse market reaction and expect the Fed to correct this oversight promptly.

Additional Themes

US Political Uncertainty Eases – Some analysts are suggesting that Joe Biden’s strong showing on Super Tuesday, which has dramatically upped his delegate count and vaulted him back into front-runner status, is a key factor in today’s rally in US equities. But this narrative fails to explain why EU stocks would also be advancing this morning. For now, the impact of US politics is likely to be stronger in certain sectors, like policy-sensitive healthcare which rallied substantially today, than in the broader indexes.

Global Economic Data Shows Uneven Virus Impact – China’s service sector purchasing managers’ index (PMI) for February plummeted to a record low of 26.5 after last month’s reading of 51.8. For context, PMIs above 50 denote expansion. The US service PMI is due today.

OPEC Prepares to Support Oil Prices – Crude futures are receiving support this week on reports that Russia is set to cooperate with additional OPEC supply cuts designed to stem oil price downside. The cartel’s summit in Vienna on Thursday and Friday is set to yield steeper output curbs, which sources suggest could be up to 1 million barrels per day (bpd).

Afternoon Markets Brief 2-27-2020

Summary and Price Action Rundown

US equities fell precipitously and added to the steep losses on the week as investors confront the risk that the coronavirus outbreak develops into a global pandemic. The S&P 500 fell 4.4% as the first case of the coronavirus in the US raised investor’s fears to the potential fallout from the expanding epidemic. The index is now down 12.0% from last Wednesday’s record high. Overnight, equities in Asia were mostly down again, with the Shanghai Composite outperforming. European stocks closed 3.4% lower and are also now down more than 10% from recent highs. Treasuries are continuing their rally, driven by heightened safe-haven demand and a darkening economic outlook, with the 10-year yield trading at a record low of 1.26%. The dollar is continuing to fluctuate below recent multi-year highs. Brent crude prices fell below $52 per barrel on demand fears.

Coronavirus Fears Continue to Drive Market Volatility

News of the first likely case of community spread of the coronavirus in the US, alongside widening outbreaks in numerous other countries, are weighing further on market sentiment. The latest developments are forcing investors to confront the likelihood of a wider, lengthier, and deeper impact of the epidemic, or even its expansion into a global pandemic. Goldman Sachs is now estimating that US companies will have zero earnings growth this year due to the coronavirus and Japan is closing schools nationwide (more below). CDC officials are counseling preparedness for a pandemic, meaning “community spread” of the coronavirus and a “significant disruption to our lives” in the US, but note that the trajectory of the outbreak remains “very uncertain.” Last evening, President Trump gave a press conference focusing on the coronavirus and placing Vice President Pence in charge of the response, who added National Economic Council Director Larry Kudlow and Treasury Secretary Steven Mnuchin to the team. Rising infection figures and expanding quarantines in Italy, Japan, South Korea, and other countries have dispelled prior optimism over the prospects for quick containment, which had lifted global equity markets over the past few weeks. News out of China, however, has taken a more positive tone, with various provinces reducing their threat levels and reports of increasing factory activity. Today, Starbucks announced it is reopening cafes across China after the virus forced widespread closures last month. Currently 85% of its 4,292 locations are open. Nationwide, total infections are reported to be 82,446 while fatalities have reached 2,808. Regarding the economic costs, rating agency Moody’s has noted that a worldwide recession is likely in the event of a pandemic and some prominent Wall Street strategists are calling for more downside for US equity markets in the near-term. Meanwhile, the list of companies downgrading their 2020 profit forecasts due the epidemic continues to grow. –MPP note: We are arranging a call for our clients with noted epidemiologist Dr. Christopher Mores on Tuesday next week. Please send any advance questions in a reply to and stand by for details of the call.

Investors Monitor Overseas Stimulus Efforts and Fed Easing Prospects

Recent Fed communications have conveyed a steady policy stance despite concerns about the impact of the outbreak, while markets see rate cuts restarting in the coming months as stimulus measures also ramp up overseas. Analysts are noting a Wall Street Journal op-ed this morning from former Fed Board Member Kevin Warsh advocating for front-loaded Fed easing in coordination with other major central banks to cushion the economic impact of the outbreak. However, Vice Chair Clarida’s remarks earlier this week gave little indication that the bias of the FOMC is shifting toward more easing in the coming weeks and months, noting that it is “too soon” to estimate the possible fallout. Several regional Fed Presidents have echoed that position this week. Price action in Treasury markets is aligned with Warsh’s viewpoint, reflecting a prompt return to easing by the Fed.

Today, Chicago Fed President Charles Evans said that the Fed may need to let inflation overshoot its 2% target in the future in order to ensure inflation is not so weak that policy rates get stuck near zero. The 10-year Treasury yield is now trading at 1.26% after yesterday breaking below the prior all-time intraday low of 1.32% registered during the global deflation scare of 2016. Treasury yield curves (the yield spread between Treasuries of differing maturities) remain flat, and in some cases inverted, which is considered a warning of impending recession.

Meanwhile, futures markets are pricing in more than two Fed rate cuts by June and nearly 90% odds that the Fed starts lowering rates again at the March 18 meeting. Overseas, stimulus measures are being marshalled but the responses remain disparate. Germany is set to loosen its self-imposed fiscal straightjacket, China’s central bank is adding accommodation, and Hong Kong’s government is giving cash directly to its citizens in an attempt to cushion the economic impact of the virus. However, the Bank of Korea held rates steady overnight at 1.25% and a European Central Bank official stated that “more clarity” is needed before policymakers can confront “hard to understand implications” of the outbreak. – MPP view: We expect the Fed to be responsive to the yield curve, deploying cuts to counter a 2/10 inversion, as well as to futures markets that demand rate cuts, but there may be a critical lag in their response due to general policy inertia and specific concerns about making major monetary policy moves in an election year.

Additional Themes

Japan Cancels School to Fight Coronavirus – Japanese PM Shinzo Abe announced that the entire Japanese school system will be asked to close from Monday until spring break in late March to help contain the coronavirus outbreak. The number of cases in Japan rose to more than 200 as 15 new cases were identified on the northern island of Hokkaido.


US Economic Data in Focus – The second estimate of US GDP showed the economy grew 2.1% in Q419, the same as in Q3 and matching consensus expectations. The contribution from net trade was revised higher and the drag from inventories was smaller, while PCE rose less than initially estimated and nonresidential investment shrank faster. For full year 2019, the economy grew 2.3%, the least since 2016 and below the Trump administration’s 3% target.

January Durable Goods Orders dropped 0.2% month-on-month (m/m) in January, following a 2.9% advance in December, but well above market expectations of a 1.5% fall. Demand for transport equipment shrank 2.2% due to decreases in orders for motor vehicles and parts and defense aircraft and parts. Demand for civilian aircraft jumped 346.2%, reversing a 66.7% fall in December.

January Pending Home Sales jumped 5.2% m/m, rebounding from a 4.3% drop in December and beating forecasts of a 2.2% gain. Only the West region reported a drop in monthly sales, while the Northeast, Midwest and South all saw pending home sales growth. Exceptionally low mortgage rates are helping support the housing market, but the existing home market is struggling with a record low supply of homes for sale, currently the lowest since 1999. MPP View-With the spread of the Coronavirus spreading across the globe, all data pre-virus will be overlooked, and all data post will be blamed on the virus, lessening the usual market significance. However, the virus is raising the odds of preemptive Fed rate cuts but the bar is still high in an election year.