Morning Markets Brief 5-14-2020

Summary and Price Action Rundown

Global risk assets are mostly lower this morning as investors continue to digest this week’s somber messaging from Fed Chair Powell and Dr. Fauci while monitoring the latest developments on the US-China front and incoming unemployment data. S&P 500 futures indicate a 0.3% lower open, which would deepen this week’s 3.8% loss for the index that has taken year-to-date downside at 12.7% and the decline from February’s record high to 16.7%. Equities in the EU are underperforming again this morning while Asian stocks also declined overnight. Longer-dated Treasury yields are heading back toward recent lows amid the cautious tone in markets, with the 10-year yield at 0.61%. Meanwhile, the dollar is moving higher within its recent trading range. Crude oil, however, is bouncing back near one-month highs.

Fed Chair Powell Conveys Caution but Downplays Negative Rates

Yesterday, Chair Powell echoed his colleagues’ skepticism on negative interest rate policy (NIRP) but provided scant insight into what further easing measures the Fed is likely to enact, while market participants focused on his emphasis of downside risks. Chair Powell spoke yesterday on the extended impact of the coronavirus on the US economy and Fed’s response. His tone was cautious, calling the pandemic the “biggest shock to the economy in modern times” and noting that “there is a lot of uncertainty ahead.” Powell opined that “over the course of the next month or so unemployment will peak” but noted that “there is a growing sense that the recovery may come more slowly than we would like” and could thereby “turn liquidity problems into solvency problems.” Regarding future policy actions, he reiterated that “the committee’s view on negative rates has not changed. [NIRP] is not something we’re considering.” Powell also sent a message to Capitol Hill, stating that “additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” saying it was ultimately up to Congress and the administration to consider this trade-off. For context, Fed policy actions have thus far eased stresses in dollar funding markets, credit channels, municipal bonds, and US Treasuries, thereby suppressing systemic risks and bolstering investor sentiment.

Fiscal Relief Efforts Stall Ahead of More Jobless Data

With House Democrats, Senate Republicans, and the White House at loggerheads over the size and composition of the next round of pandemic relief spending, today’s latest unemployment claims reading is expected to show a high level but declining trend of new filings. Yesterday, President Trump called the $3 trillion HEROES Act crafted by House Democrats “dead on arrival,” and Treasury Secretary Mnuchin echoed this sentiment, indicating that the administration is intent on pausing for “the next 30 days and think carefully.” For context, the draft bill 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. With investors pondering the uncertain prospects for an economic rebound, Secretary Mnuchin reiterated his upbeat outlook for the recovery in a TV interview last evening. Later this morning, initial jobless claims for the week ending May 9th are due, with estimates for 2.5 million new filings. While this would still be an exceptionally grim tally, it would also represent a decline from the prior week’s 3.2 million, which lifted the total reported since the beginning of the coronavirus crisis to 33.5 million, equivalent to an unemployment rate of 22%. Analysts will also note tomorrow’s April readings of US retail sales and industrial production.

Additional Themes

US-China Tensions Remain in Focus – In an interview, President Trump stated that he is focused on Chinese companies that are listed on the NYSE and Nasdaq but have not been subjected to US-standard accounting rules. This comes after news that the US government retirement savings fund, the Thrift Savings Plan (TSP), is suspending their upcoming move that would have allocated a portion of its holding to Chinese stocks in proportion to the weightings of the MSCI All Country World Index. The White House had reportedly been mulling an executive order to compel the TSP to halt this reallocation. California Governor Newsom has also come under pressure to divest his state’s massive pension funds from Chinese stocks. For context, political pressure to limit US public pension exposure to Chinese equities has been percolating for months, well before the pandemic hit, and these current developments are not being explicitly cast as retaliation for China’s handing of the coronavirus outbreak.

Bank of England (BoE) Downplays NIRP – Mirroring Fed Chair Powell’s stance, BoE Governor Bailey stated today that negative interest rates are “not something we’re contemplating” but refused to categorically rule out such a move. Nevertheless, yields on 2-year UK sovereign bonds remain in slightly negative territory.