Summary and Price Action Rundown
Global risk assets are moving lower this morning as the dizzying rally fueled by optimism over economic reopening takes a breather, with investors weighing the latest Covid-19 data and looking ahead to this week’s Federal Reserve meeting. S&P 500 futures point to a 0.8% lower open after the index erased its 2020 losses yesterday following a two-week sprint higher during which it gained 9.4% over 10 trading sessions. The S&P 500 is now barely 4% below record highs from February while the tech-heavy Nasdaq registered a new record high and is up 12.7% year-to-date. Equities in the EU are also retracing a portion of their ongoing rally this morning, while Asian stocks were mixed overnight. Longer-dated Treasury yields are unwinding their breakout from their two-month trading range, with the 10-year yield settling to 0.83%, while the dollar is pausing its downtrend. Crude oil is also in counter-trend mode this morning after climbing briefly to a new multi-month high yesterday on the OPEC+ supply cut extension.
Markets Pause to Assess Reopening and Recovery Prospects
Amid mixed signals from financial markets, public health officials, economic data, and Covid-19 infection figures, investors are pondering whether the recent bout of optimism has been overdone. The sense of relief in recent weeks has been palpable, with even the US epicenter of the pandemic, New York City, starting the process of reopening this week after two months of lockdown. According to the NYC Department of Small Business Services, about 16,000 “nonessential” retail businesses and 3,700 manufacturing companies will reopen, in addition to more than 32,000 construction sites being allowed to restart work. Absent a resurgence of cases, the city could move into the second phase of reopening after two weeks. A gauge of US small business optimism released this morning captured the hopeful mood, rising to 94.4 in May from 90.9 the prior month, though the uncertainty subcomponent remains elevated. Some Congressional Republicans are seizing on the improving outlook, most prominently featured in the May nonfarm payroll spike, to advocate for a longer pause before passing the next pandemic relief bill. White House advisor Kevin Hassett said yesterday that the odds of another aid package were “100%” but suggested that the Trump administration would prefer to see July data before deciding on the magnitude and substance of the bill. Meanwhile, analysts are monitoring data showing an increase in Covid-19 cases in California, Florida, Texas, other states that have been in the process of reopening, though increased testing may be a factor.
Federal Reserve Tweaks Lending Program Ahead of June Meeting
Monetary policy is in the spotlight this week as the FOMC begins its two-day meeting today. In advance of its June meeting, the Fed announced yesterday afternoon that it would be adding further flexibility to the terms of its 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. This comes as market participants await what is expected to be a relatively uneventful FOMC meeting from a policy perspective, with all settings expected to remain steady, but with significant interest as to the accompanying communications on future monetary maneuvers. Specifically, 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. This meeting also will include new FOMC Economic Projections and the dot plot of expected rate levels.
Oil Prices Stumble on Saudi Announcement – Crude oil is continuing to retrace a portion of its steep multi-month rally as traders take profits after OPEC and its allies (collectively known as OPEC+) agreed on Saturday to extend output curbs through July. Notably, however, Saudi’s Energy Minister announced that the Kingdom’s voluntary additional cuts of 1.2 million barrels per day will conclude in June, weighing further on oil prices yesterday. Other headwinds include the resurgence of Libyan output and a burgeoning recovery in US shale oil production.
World Bank Issues Grim Outlook – Amid the global economic fallout from the coronavirus pandemic, emerging and developing economies are set to shrink this year for the first time in the last 60 years according to the World Bank. The bank’s forecast warns that as many as 100 million people in the developing world will be tipped into extreme poverty by a projected 2.5% contraction in emerging markets’ GDP. Recently, major developing countries have seen a rapid increase in Covid-19 cases, including Brazil, Russia, and India. Overall, the World Bank sees the global economy shrinking 5.2% for the year, which is steeper than the IMF’s -3.0% projection from April, reflecting the growing economic impact of the virus. The report warned of a more adverse scenario in which the global GDP contraction could be as high as 8%, with emerging market economies shrinking around 5% and an estimated sluggish 1% global recovery in 2021.