Summary and Price Action Rundown
Global risk assets are mixed this morning as investors await remarks from Fed Chair Powell and monitor the prospects for additional US fiscal support amid heightened uncertainty over economic reopening efforts. S&P 500 futures point to a 0.5% higher open after yesterday’s 2.1% loss took year-to-date downside to 11.2% and the decline from February’s record high to 15.2%. Equities in the EU are underperforming this morning amid downbeat earnings while Asian stocks were mostly higher overnight. Longer-dated Treasury yields are hovering above recent lows ahead of Chair Powell’s speech, with the 10-year yield at 0.67%. The dollar remains in the middle of its recent trading range and crude oil is stable around one-month highs.
Spotlight on Fed Policy Ahead of Chair Powell’s Remarks
With FOMC officials this week almost unanimously talking down the appropriateness of negative interest rate policies, analysts are expecting Chair Powell to follow suit but also provide more insight into what further easing measures the Fed is likely to enact. Yesterday, 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), as did Minneapolis Fed President Kashkari, although he declined to rule out the policy entirely. This comes after Monday’s statements 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 expect Fed Chair Powell to echo his colleagues’ skepticism on NIRP in his remarks on today but are also anticipating guidance on what additional easing measures are being considered. For context, in the press conference following the late April Fed meeting, Chair Powell expressed his opinion that the economy would require more monetary support from the Fed in the coming months but did not specify his preference for a particular policy tool. Meanwhile, the New York Fed announced Monday 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.
Uncertainty Over Economic Reopening While Congress Wrangles Over Further Relief
Yesterday’s virtual Senate testimony by White House coronavirus advisor Dr. Fauci highlighted the challenges of reopening the economy, while partisan divisions deepen over the next round of fiscal support for the ailing economy. Dr. Fauci sounded a cautious note in his testimony yesterday, 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 potential for secondary infection spikes and re-imposed lockdowns, US equities retraced a portion of their recent rally yesterday but have stabilized overnight. Meanwhile, 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, this bill, dubbed the 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.
Additional Themes
Oil Prices Stabilizing Above Lows – Oil prices are little changed this morning as traders await official US stockpile data later today, with estimates suggesting the first decline since February. For context, brimming US oil storage helped spur a flight from the expiring May WTI contract last month, with market participants shunning physical delivery, which sent that contract into negative territory. OPEC’s monthly report is also due today. After the swift two-day oil price rebound stalled last Wednesday, both international benchmark Brent crude and US benchmark WTI front month futures have spent the past week trading in a choppy sideways pattern.
UK GDP Contracts – First quarter (Q1) UK GDP printed -1.6% year-on-year, bettering estimates of -2.2%, though the economy shrank nearly 6% in March and estimates for Q2 reflect a much steeper retrenchment. The Bank of England has cut its policy rate to 0.10% and is engaging in asset purchases (quantitative easing), with accommodation expected to be augmented at next month’s meeting. Yields on 2-year UK sovereign bonds are -0.03% suggesting that NIRP is possible. The pound, however, is taking the data in stride, rising a moderate 0.3% versus the dollar this morning at 1.23 to hold well above the crisis lows of 1.15 in March.