Morning Markets Brief 9-17-2020

Summary and Price Action Rundown

Global risk assets mostly retreated overnight as yesterday’s Federal Reserve decision spurred mixed market reactions, while investors await key US jobs data. S&P 500 futures point to a 1.2% lower open after the index lost 0.5% yesterday, retracing the prior session’s upside and paring its year-to-date gain to 4.8%, which is around 5.5% below early September’s record high. The tech-heavy Nasdaq returned to underperformance yesterday, sinking 1.2% and paring its year-to-date gains to 23.2%. Equities in the EU and Asia also posted losses overnight. Despite yesterday’s resolutely dovish messaging from the Fed, a broad dollar index is finding support near its recent 28-month low, while longer-dated Treasury yields are slipping lower, with the 10-year yield at 0.67%. Brent crude prices are back above $42 as OPEC+ meets today.

Federal Reserve Decision Continues to Reverberate in Markets

Investors are still digesting yesterday’s Fed decision, which featured increasingly accommodative guidance on rates, though the FOMC declined to enact the most dovish potential formulations that some had predicted. Analysts are pondering the nuanced and muted reaction in financial markets to what was a historically dovish Federal Reserve meeting. In yesterday’s decision, the FOMC unsurprisingly left interest rates unchanged at 0-0.25% and projected that it would maintain this ultra-low rate range through at least 2023 in order to facilitate the US economy recovery from the fallout of the coronavirus pandemic. Specifically, the accompanying statement indicated that this accommodative rate would likely be maintained “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” Analysts are noting that the US economy has very seldom achieved this highly favorable economic scenario during the modern era. Dallas Fed President Kaplan dissented in favor of a more flexible formulation, allowing for more proactive monetary tightening, while Minneapolis Fed President Kashkari expressed his preference to steer policy toward 2% inflation “on a sustained basis.” The statement also reiterated a commitment to continue buying Treasuries and mortgage backed securities at least at the current pace of $80 billion and $40 billion, respectively, over “coming months.” In his press conference, Chair Powell declined to invoke the strictest form of “enhanced guidance,” which would formally tie policy decisions to inflation and unemployment targets. He did mention that the Main Street Lending Program, which has now deployed a paltry $2 billion of its $600 billion total firepower, is being tweaked in an effort to improve uptake.

Jobless Claims in Focus Amid Questions Over the Recovery Trajectory

After yesterday’s US retail sales figures for August undershot expectations, analysts will parse today’s release of last week’s initial jobless claims for any further indications of economic backsliding. Initial jobless claims for the week of September 12th are expected to improve to 850K after the prior week’s tally remained unchanged from the previous reading at 884K, missing market expectations of 850K. Continuing claims are expected to improve slightly after the reading for the week of August 29th rose nearly 100K to 13.38 million, topping expectations of 12.904 million. Alongside the disappointing initial claims last week, claims for Pandemic Unemployment Assistance (PUA) rose by 91K, marking the fourth straight increase. Combining the standard claims with PUA continuing claims means that 27.8 million people are receiving unemployment insurance payments, up from 25.7 million in early August. Analysts will be highly attuned for any downside surprise after retail sales showed a loss of momentum in August, rising 0.6% after the downward revision of July’s number to 0.9% and missing the consensus forecast of a 1.0% increase. The deceleration of retail sales over recent months has been blamed on the expiration of federal unemployment benefits, the drying up of support for small businesses, and the persistence of the pandemic. Meanwhile, flickers of hope on the US fiscal front continued brightening yesterday following of weeks of stalemated negotiations as the White House expressed support for the compromise $1.52 trillion proposal put forth by the House “Problem Solvers Caucus,” a group of 50 centrist Representatives.

Additional Themes

Bank of Japan (BoJ) Holds Steady – As widely expected, the BoJ left its policy settings fixed at its meeting overnight, though its economic projections were upgraded modestly. Amid the abrupt change in government leadership, with longtime Prime Minister Abe stepping down for health reasons, Governor Kuroda’s press conference emphasized policy continuity.

Oil Steady as OPEC+ Meets – After some whipsaw price action over the past week, oil prices are stable this morning in the middle of their recent ranges as OPEC and its allies (OPEC+) meet today to review their ongoing production cuts. Although the output curbs have been tapered since their tightest levels over the summer, Saudi and Russia have been pushing laggard cartel members for compensatory cuts over the fall.