Summary and Price Action Rundown
Global risk assets are fluctuating moderately this morning ahead of today’s Federal Reserve decision, while investors continue to monitor noisy economic data for signs of a rebound alongside Covid-19 infection data for the risk of a secondary spike. S&P 500 futures point to a flat open after the index backed off its loftiest level since late February yesterday following a dizzying two-week surge higher. Equities in the EU and Asia similarly lacked direction overnight. Longer-dated Treasury yields continue to retrace last week’s breakout from their two-month trading range, with the 10-year yield descending to 0.80%, while the dollar struggles amid anticipation of more ultra-accommodative messaging from the Fed today. Crude oil remains choppy at current levels, with concerns over today’s US stockpile figures weighing this morning.
Investors Await Today’s Conclusion of the June Federal Reserve Meeting
Significant monetary policy changes are not expected, so the focus will be on the accompanying communications, which will include new economic and interest rate projections. In his press conference following today’s FOMC decision, Chair Powell is expected to discuss additional policy options to extend their extraordinary monetary easing over the coming quarters, with yield curve control and enhanced forward guidance sure to be among the options discussed. Analysts will be attuned to the Fed’s treatment of last week’s spike in nonfarm payrolls for May given that FOMC members have been almost entirely focused on downside risks to the economy in their remarks over the past weeks and months. There will also be scrutiny of the Fed’s quasi-fiscal programs that are designed to provide funding to corporations, states and municipalities, and medium-sized businesses. Earlier this week, the Fed announced yesterday afternoon that it would be adding further flexibility to the terms of its long-awaited Main Street Lending program, cutting the minimum loan size to $250k from $500k, allowing a deferral of principal repayments for up to two years instead of the previous one-year grace period, and lengthening the maturity from four years to five. Chair Powell is likely to be pressed for further details on the timeline for launch of this program. This meeting also will include new FOMC economic projections and the dot plot of expected rate levels, as well as a focus on the risks of self-reinforcing disinflationary dynamics (more below).
Global Economic Data Remains Inconclusive on Recovery Trajectory
Despite euphoria in equities and incrementally encouraging signs from other financial markets, last Friday’s astoundingly upbeat nonfarm payroll numbers remain the exception amid uneven and fitful signals from most other traditional economic data. After the World Bank’s dismal projections earlier this week, the OECD weighed in with its forecasts for a 6% global growth contraction this year, with its estimate for US GDP at -7% and the EU at -9%, and only a 5% rebound in 2021 for the worldwide economy. Overnight, South Korea, which is held as the gold standard in Covid-19 containment for a major sovereign nation, reported its highest level of unemployment in a decade in May despite social distancing restrictions having been lifted in April. Joblessness rose to 4.5% from 3.8% the prior month, outpacing expectations for an increase to 4.0%. Economists cite the lack of external demand as continuing to weigh on the trade-oriented South Korean economy. Meanwhile, data filtering in from April continues to show the depths of the economic shock from the pandemic, with Japan machine tool orders contracting 12.0% month-on-month while Germany’s exports plunged 24.0% month-on-month and 31.1% year-on-year, sending the trade surplus to its steepest monthly decline on record and the narrowest point since December 2000.
Deflation Risks in Focus – Overnight, releases of May producer price data in Japan and China showed worsening deflationary pressures, with respective readings of -2.7% year-on-year (y/y) and -3.7% y/y both undershooting estimates and evidencing deterioration from April’s level. In the US, May consumer goods inflation data is out today, and the producer price index is due tomorrow, with expectations for stabilization of both gauges. Market-based indicators of long-run inflation expectations for the US, such as 10-year TIPS breakevens, have rebounded from the March trough but only to equal the previous multi-year lows of the 2016 global deflation scare.
Wariness Continues over Coronavirus Data – Analysts continue to monitor figures showing an increase in Covid-19 cases in California, Florida, Texas, Arizona, other states that have been in the process of reopening for economic activity. Reports yesterday also indicated that a number of National Guardsmen mobilized to respond to protests last week have tested positive for Covid-19. White House public health advisor Dr. Fauci stressed in remarks yesterday that the coronavirus pandemic “isn’t over yet” in the absence of a vaccine.