Summary and Price Action Rundown
Global risk assets are moving lower this morning as the cautious tone of yesterday’s Federal Reserve communications and signs of a potential secondary spike in US Covid-19 infection data raise concerns that recovery optimism had become overdone in recent weeks. S&P 500 futures indicate a -1.7% lower open after the index erased all of its year-to-date downside on Monday and then posted two consecutive days of losses for the first time in nearly a month. The Nasdaq is also set to open to losses after registering a new record high yesterday. Equities in the EU and Asia also retreated overnight. Longer-dated Treasury yields have almost fully reversed last week’s breakout from their two-month trading range, with the 10-year yield descending to 0.71% this morning, while the dollar is receiving a renewed safe-haven bid after falling steeply over recent weeks. Crude oil is lower as well, with Brent slipping below $41.
Fed Holds Policy Steady and Commits to Extend Extraordinary Easing
Yesterday, the FOMC retained its current policy settings and Chair Powell discussed the potential for yield caps and augmented guidance down the road as expected, though some analysts are pointing to the Fed’s focus on downside risks as denting market sentiment. The highly anticipated FOMC decision yesterday matched consensus expectations that rates would be left unchanged and no new policies would be enacted. Still, the tone of the accompanying statement and Chair Powell’s press conference was decidedly cautious, which is consistent with prior communications. According to the updated interest rate projections (the “dot plot”), all but two FOMC members expect that it will be appropriate to keep rates at zero through 2022. However, market participants were left uncertain regarding future policy maneuvers, with Chair Powell again only noting that forward guidance and yield curve control (YCC) are being considered. Alongside the rate outlook, the Fed projected that the US economy will shrink 6.5% in 2020 but show a 5.0% gain in 2021 followed by 3.5% in 2022, with unemployment estimated to be 5.5% by the end of 2022. The range of forecasts is wide, however, reflecting great uncertainty over the possible lingering impact of the virus. Also, the Fed reinforced its commitment to maintain “smooth market functioning” by promising to maintain its Treasury and mortgage purchases “at least at the current pace” of $80bn Treasuries and $40bn of mortgage backed securities (MBS) a month “over coming months,” as opposed to its previously open-ended commitment to quantitative easing (QE). For context, the Fed went from a peak of $300 billion a month in Treasuries during the early days of the coronavirus crisis to $80 billion more recently. The QE outlook seems to have been somewhat below consensus expectations, with some market participants anticipating an increase in Treasury purchases and doubling of MBS purchases. The stock market reaction was initially mixed, as growth-sensitive equity sectors retreated and tech stocks surged anew, but sentiment has turned more negative overnight. Meanwhile, the ensuing downside for Treasury yields and the dollar is straightforward and consistent with the exceptionally dovish rate messaging.
Covid-19 Conference Call on Resurgence Risk
The rising potential for a secondary spike of Covid-19 cases as lockdowns ease is another factor that is weighing on investor sentiment this week. Analysts continue to monitor figures showing an increase in coronavirus cases in California, Florida, Texas, Arizona, other states that have been in the process of reopening for economic activity. Yesterday, Texas reported its highest number of daily cases since the pandemic began. White House public health advisor Dr. Fauci stressed in remarks earlier this week that the coronavirus pandemic “isn’t over yet” in the absence of a vaccine. – MPP conference call: Please join us this morning at 11am for a call with Dr. Chris Mores, a virologist and Program Director for the Global Health Epidemiology and Disease Control MPH program at the Milken Institute School of Public Health of George Washington University. Dr. Mores will discuss how he is interpreting the latest Covid-19 infection data and his outlook for the coming months, particularly in light of the mass gatherings in many US cities over the past week.
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US Jobless Data in Focus After Nonfarm Payroll Surprise – Initial unemployment claims for the week ending June 6th are expected to show 1.550 million new filings. For context, the prior week, 1.877 million Americans filled for unemployment benefits, the lowest level since the coronavirus crisis began almost three months ago. Still, this was slightly above market expectations of 1.80 million and lifted the total reported since March 21st to 42.6 million. The largest increases in jobless claims were reported in California and Florida, while those in New York dropped sharply. Meanwhile, continuing claims unexpectedly rose to 21.5 million in the week ended May 23rd, above expectations of 20 million. These datapoints contrast with last Friday’s May nonfarm payroll data, which showed that the US economy gained 2.5 million jobs in May, smashing expectations of 7.5 million more jobs lost and marking the largest jobs increase in the history of the series after 20.7 million lost jobs in April.
Crude Prices Retreat from Recent Highs – US crude inventories hit a record high last week after posting declines for three of the four preceding weeks, compounding pressure on oil prices as traders increasingly question the optimistic case for a rebound in