Market Reports

Summary and Price Action Rundown

Global risk assets are continuing this week’s rebound today as bouncing US retail sales, central bank accommodation, and the prospect for additional fiscal stimulus help offset worries over a possible reacceleration in Covid-19 infections amid US economic reopening. S&P 500 futures indicate a 0.5% higher open after the index extended its ongoing rally for a third day yesterday, paring its year-to-date downside to 3.3% on the parade of supportive developments. May US retail sales joined nonfarm payrolls as bright spots amid a muddled economic picture (more below). Equities in the EU are higher while Asian stocks were mixed overnight. The dollar is flat, as are longer-dated Treasury yields, with the 10-year yield at 0.75%. Crude oil is giving back some recent gains, with Brent slipping back toward $40 per barrel.

US Retail Rebound Stands Out Amid Muddled Global Recovery Signals

US consumption evidenced a burst of pent-up demand in May but other economic datapoints show less vigorous recovery. US retail sales surged 17.7% month-on-month (m/m) in May, easily beating expectations of an 8.4% jump and recovering from the record 14.7% fall in April. This is the largest monthly increase on record, as states eased restrictions and many stores and restaurants reopened from the coronavirus lockdown. This figure pushed the overnight rally in US equity futures even higher before yesterday’s opening bell. US industrial production was less impressive, advancing only 1.4% m/m in May after falling a record 12.5% in April and missing consensus expectations of a 2.9% rebound. Meanwhile, Japan’s exports fell 28.3% year-on-year (y/y) in May, undershooting expectations for -26.1% and worsening from April’s -21.9%, with shipments to the US down by 50.6% y/y. Imports declined 26.2% y/y, suggesting continued weakness in domestic Japanese demand, while a gauge of manufacturer sentiment also deteriorated further in June.

Extraordinary Fiscal and Monetary Stimulus Continues to Underpin Market Sentiment

Yesterday’s news that the White House is preparing a $1 trillion national infrastructure proposal and more ultra-accommodative messaging from Fed Chair Powell are adding fuel to this week’s US equity rebound. On the infrastructure front, the Transportation Department is said to be working on the draft plan that focuses on traditional projects (i.e. bridges, roads) but allocates a portion of the funds to the buildout of 5G infrastructure and rural connectivity. Although this news attracted a degree of skepticism from some reporters, Caterpillar and Aecom gained 5.3% and 3.9%, respectively, yesterday while Nucor steel jumped 6.4% and an ETF of infrastructure stocks gained 3.0%. Also yesterday, Federal Reserve Chair Powell reiterated his assessment of predominant downside risks in his testimony before to the Senate Banking Committee as part of his semiannual monetary policy report to Congress. Chair Powell remarked that “significant uncertainty remains about the timing and strength of the recovery,” and although the US economy is beginning to rebound, he reiterated the Fed’s commitment to using “the full range of policy tools” available. For context, the Fed announced earlier this week that it would be expanding its corporate credit support program to buy individual company bonds and is finally launching its long-awaited Main Street Lending Program. However, Chair Powell continued to make the case that fiscal spending may provide a more appropriate form of support in these circumstances. Today is his second and final day of testimony on Capitol Hill, this time appearing before a House Financial Services Panel.

Additional Themes

Mixed Covid-19 Developments – According to reports earlier this week, Dexamethasone, a cheap and widely-used steroid, appears set to become the first drug treatment yielding life-saving results among Covid-19 patients, and is now being referred to as a “major breakthrough” by some scientists. This positive development helped offset concerns about a secondary outbreak in Beijing after weeks of relative normalcy, as well as a further infection increases in various US states that have engaged in economic reopening, such as Texas and Florida. Yesterday, White House public health advisor Dr. Fauci indicated that the rising cases could not be explained by increased testing, adding that this is still the “first wave” and not a secondary spike in infections. Thus far, no mass lockdowns have been re-imposed in the US.

Rising Risks Around Geopolitical Flashpoints – After North Korean forces demolished a liaison office on their side of the border yesterday and moved to occupy areas of the buffer zone near the border, South Korea has warned that it will not tolerate further provocation from Pyongyang. South Korean assets, which tend to be resilient in the face of North Korean bluster, have been choppy this week, with the South Korean won (KRW) down 0.8% versus the dollar since the weekend, though the benchmark Kospi index is slightly higher over the past three sessions. Meanwhile, tensions are ebbing at the disputed India/China border after recent clashes between the two sides resulted in reports of casualties, with signs of détente emerging.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning as central bank largess and the prospect for additional fiscal stimulus help offset worries over a possible re-acceleration in Covid-19 infections due to US economic reopening. S&P 500 futures point to a 1.3% higher open after the index recovered from steep early losses yesterday to close in positive territory. The midday announcement by the Federal Reserve of enhancements to its corporate bond purchase program helped accelerate the rebound (more below). Equities in the EU and Asia posted solid gains overnight. Longer-dated Treasury yields are edging higher, with the 10-year yield rising to 0.74% this morning, while the dollar is slightly weaker. Crude oil is also bouncing, with Brent climbing above $40 per barrel.

Global Central Banks Increase Extraordinary Stimulus

Investor risk appetite continues to receive support from ever easier monetary policy around the world, with the Federal Reserve announcing yesterday that it would begin purchasing individual corporate bonds and the Bank of Japan overnight upsizing its lending program to cash-strapped businesses. Yesterday, US equities accelerated to the upside after the Fed announced updates to the $750 billion Secondary Market Corporate Credit Facility (SMCCF), thereby expanding its purchases beyond credit ETFs to include individual bonds that have remaining maturities of five years or less. For context, the SMCCF is designed to support market liquidity and the availability of credit for large employers. However, this augmentation of the program is not evidently in response to any increased stress in the market, given that the spreads on both investment grade and high yield bonds are already back at their most favorable levels since early March and companies have issued a flood of debt in recent months, with investment grade companies raising nearly as much so far in 2020 as they did all last year. This followed the Fed’s announcement earlier on Monday that the long-awaited $600 billion Main Street Lending Program (MSLP) is finally up and running after significant changes to the lending terms had been made in order to make it more attractive for businesses to borrow. Chair Powell is expected to discuss these programs, future policy options, and his somber outlook for the US economy in his biannual Humphrey-Hawkins testimony before Congress this week, which starts today with the Senate Banking Committee. Meanwhile, Governor Kuroda remained similarly focused on downside risks to Japan’s economy and the potential for a second wave of the pandemic later this year at the Bank of Japan (BoJ) meeting overnight. The BoJ beefed up its support for domestic businesses, increasing its corporate lending facility from roughly $750 billion to $1 trillion, though it retained its yield curve control settings. Governor Kuroda indicated that ultra-accommodative settings could extend until 2023.

Trump Administration Preparing to Propose Major Infrastructure Bill

Amid increasing speculation over the timing, size, and composition of the next US pandemic relief package, reports indicate that the White House is also preparing a $1 trillion proposal for national infrastructure projects. The Transportation Department is said to be working on the draft plan, which will prominently feature spending on roads and bridges, but also includes funds for 5G development and rural broadband connectivity. Analysts note that the September 30^th expiry of the current funding bill for transportation infrastructure, the Fixing America’s Surface Transportation (FAST) Act, provides a timeline for the rollout of this proposal. Meanwhile, House Democrats proposed a $494 billion replacement for the FAST Act earlier this month that met with opposition from Senate Republicans, who have their own version of a surface infrastructure bill worth $287 billion.

Additional Themes

Key US Economic Data Due – Analysts are awaiting this morning’s release of May retail sales data, with estimates pointing to an 8.4% month-on-month (m/m) rebound. In April, retail sales sank 16.4% m/m from March, undershooting expectations of a 12.0% drop and registering the sharpest decrease in monthly retail sales ever recorded. Year-on-year, April retail sales fell 21.6%, also a record drop. This will be followed by May industrial production figures, which are also expected to recovery, though more modestly at 3.0% m/m from the April slump of 11.2%, the largest monthly drop in the 101-year history of the index.

Geopolitical Tensions Rise in Key Hotspots – After increasingly bellicose rhetoric from Pyongyang, North Korean forces demolished a liaison office on their side of the border overnight, marking a significant escalation in tensions. Still, South Korean assets, which tend to be resilient in the face of North Korean bluster, retraced Monday’s losses, with the benchmark Kospi index soaring 5.3% and the Korean won advancing 0.8% versus the dollar. Meanwhile, reports indicate that three Indian soldiers were killed in a clash with Chinese forces near the disputed border. For context, geopolitical risks tend to be difficult for investors to assess.

Summary and Price Action Rundown

Global risk assets moved sharply lower overnight as investors continue to grapple with the risk that a secondary spike in Covid-19 infections will impede economic reopening. S&P 500 futures indicate a 2.2% lower open after the index suffered its first weekly decline in a month last week, sliding 4.8%. The sharp rally for the S&P 500 in prior weeks had erased the index’s year-to-date downside as of last Monday. Equities in the EU are similarly lower while Asian stocks posted some steep declines overnight. Longer-dated Treasury yields have reverted to their previous range, with the 10-year yield descending to 0.67% this morning, while the dollar is edging higher. Crude oil is lower, with Brent dropping toward $38 per barrel.

Covid-19 Resurgence Risk Weighs on Investor Sentiment

Last week’s abrupt return of market volatility, which many analysts ascribed in part to the rising number of coronavirus cases in areas that have been in the process of economic reopening, is set to continue today as infection data continued to worsen over the weekend. Texas, Florida, Georgia, Arizona, North Carolina, and South Carolina are among the states experiencing a rise in Covid-19 cases and hospitalizations. Some analysts have argued over whether these various hotspots amount to a “secondary spike” in the US when many of these states never suffered a significant initial surge like New York, New Jersey, Washington, and elsewhere. Also, there remains uncertainty over the degree to which this apparent increase in cases might be attributable to more widespread testing rather than a true uptrend in new infections. New York Governor Cuomo issued a warning over the weekend that he will seek to shut businesses that are flouting the mandated precautions for safe reopening. Meanwhile, Beijing is also experiencing a targeted lockdown after a resurgence in infections centered around a seafood and produce market has been the source of new coronavirus cases in half the districts of the city. For context, reports indicate that life in Beijing had returned to relative normalcy in recent weeks after a 50-day period without any new reported cases. –

Chinese Data Suggests a Tepid Rebound

Despite being further along the timeline of pandemic containment and economic reopening, China’s economic data continues to suggest lingering effects of the virus. Overnight, China’s key growth readings for May generally undershot estimates and conveyed a picture of gradual resumption of economic activity rather than the V-shaped rebound that some analysts had hoped. Retail sales were -2.8% year-on-year (y/y), missing expectations of -2.3% but improving from April’s contraction of 7.5%. Industrial production registered an expansion of 4.4% y/y, accelerating from the prior month’s 3.9% growth but was still shy of the forecast pace of 5.0%. Fixed asset investment, which is quoted on a year-to-date basis, slightly topped estimates, posting -0.3% versus -0.8% consensus expectations and -3.3% in April. Commentators are citing weak demand, both domestically and overseas, for the halting progress in China’s economic recovery even months past the peak of the pandemic on the mainland. Meanwhile, the Trump administration continues to send upbeat signals on the recovery, with National Economic Council (NEC) Director Kudlow stating yesterday that he sees a “very good chance” of the US economy experiencing a V-shaped rebound over the second half of this year. Last week, the Fed’s updated projections for growth in 2020 and 2021 were consistent with lingering headwinds from the pandemic. The OECD and World Bank also issued downgraded forecasts last week and the IMF is set to follow suit.

Additional Themes

White House Officials Discuss Upcoming Stimulus Measures – Over the weekend, White House advisor Navarro indicated that President Trump is seeking at least $2 trillion for the next pandemic relief bill, which administration officials have suggested would be delayed until late July. This contrasts with the statements of Senate Majority Leader McConnell, who has stated that this next fiscal package should be closer to $1 trillion. Navarro also noted the continued White House preference for a payroll tax cut. Meanwhile, NEC Director Kudlow indicated that the White House remains committed to the end-July expiry of augmented unemployment benefits, as they represent a “disincentive” to return to work. Administration officials and GOP Senators have proposed instead a “back to work” bonus for employees.

Flaring Tensions on Korean Peninsula – Increasingly bellicose rhetoric from North Korea has featured threats to cut off communications as well as aggressive pronouncements from Kim Jong Un’s sister, who analysts speculate may be the leading candidate to succeed her brother as questions continue to swirl over his health. The South Korean government called an emergency session on Sunday to assess the situation. South Korean assets, which tend to be resilient in the face of North Korean bluster, underperformed significantly overnight, with the Kospi retreating 4.8% and the Korean won sinking 1.0% versus the dollar.

Summary and Price Action Rundown

Global risk assets staging a rebound that is set to retrace a portion of yesterday’s major downside, as investors grapple with the risk that a secondary spike in US Covid-19 infections will impede economic reopening. S&P 500 futures point to a 1.6% higher open after the index suffering its worst single-session loss since March, plummeting 5.9% yesterday. This brought total losses over the past three sessions to 7.1% after Monday’s gain erased all of the S&P 500’s year-to-date downside. The Nasdaq sank 5.3% yesterday after registering a new record high the day before. Equities in the EU are similarly rebounding while Asian stocks posted moderate declines overnight. Longer-dated Treasury yields have stabilized after a round-trip over the past week, with the 10-year yield climbing back to 0.71% this morning, while the dollar is also steadying after yesterday’s burst of appreciation. Crude oil is flat, with Brent below $39.

Market Volatility Re-Intensifies Abruptly

After weeks of unrelenting equity upside premised on hopes of a swift recovery in economic activity, with tailwinds from vaccine hopes and magnanimous Federal Reserve liquidity, the upbeat trends reversed sharply yesterday amid resurgent doubts over the outlook for reopening. Analysts are pointing to various downside catalysts for yesterday’s dramatic return of volatility in stocks and global risk assets generally, chief among them the troubling data on re-intensifying Covid-19 infections in various US regions and cities that have been in the process of reopening for economic activity. Amid a resurgence of coronavirus infections, reports indicated that Houston may reopen its emergency medical facilities housed at NRG Stadium while Nashville announced a delay in its reopening plans. The downbeat tone and grim outlook communicated by the Federal Reserve at their June meeting earlier this week has also been cited as weighing on sentiment. However, this cautious messaging from Chair Powell and his FOMC colleagues has been broadly consistent for months, with the updated forecasts only adding a degree of specificity to their concerns. Lastly, the astounding speed and magnitude of the runup in equities is another factor that market participants are noting, with a technical pullback long overdue after the dizzying climb from the low of March. For context, the Nasdaq broke to new record highs on Wednesday and the S&P 500 had erased all of its 2020 downside on Monday’s rally. These stunning rebounds have placed US stocks at significantly higher valuations than earlier in the year given the impaired earnings outlook.

Trump Administration Holds the Line on Reopening and Delayed Fiscal Stimulus

Treasury Secretary Mnuchin echoed President Trump’s various pronouncements on the shifting White House policy stance toward Covid-19 yesterday, indicating that the US should not resort to lockdowns again and that another pandemic relief bill will be delayed until later in the summer. In remarks on CNBC yesterday, Treasury Secretary Steven stated that the US should not shut down the economy again even if there is a resurgence in coronavirus cases. He defended this position, which President Trump has recently espoused, by expressing confidence in the nation’s Covid-19 testing abilities, improved contact tracing, and general knowledge on the virus. Thus, Mnuchin stated, “it will not be necessary to impose restrictions again…We’ve learned that if you shut down the economy, you’re going to create more damage.” Additionally, Mnuchin applauded the bipartisan efforts to bring $6 trillion in stimulus to the economy, but he reiterated the Trump administration’s resistance to expediting another stimulus bill, preferring instead to wait until after July to negotiate the finer details of the next package. Senate Republicans have been pushing firmly for this hiatus in relief spending. “One of the things we’re going to need to be focused on is how do we help the industries that are especially impacted: hotel, travel, entertainment, restaurants,” Mnuchin said.

Additional Themes

UK Economy Contracts Sharply in April – The monthly economic GDP reading for the UK posted a 20.4% retrenchment in April from March, which had also been in negative territory but to a shallower degree at -5.8% month-on-month (m/m). Reports indicated that not only was April the sharpest UK GDP decline on record but it erased 18 years of economic expansion, shrinking the economy back to the size it was in 2002. Still, this brutal statistic was only moderately worse than the consensus forecast of -18.7% m/m and took the three-month rate to -10.4%. Industrial and manufacturing production figures for April were similarly dire. For context, the UK has the highest Covid-19 mortality rate in Europe and is facing the prospect of a no-deal Brexit at year-end. Nevertheless, the pound is steady today, holding near its highest level versus the dollar since mid-March, indicating that market participants remain focused on the recovery.

Looking Ahead – The Bank of England meets next week amid the dismal UK data, with some analysts predicting a rate cut to 0%. The Bank of Japan also has a meeting. US retail sales and industrial production for May will be in focus along with more weekly jobless claims

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.
Dial-in Details:
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Additional Themes

US Jobless Data in Focus After Nonfarm Payroll Surprise – Initial unemployment claims for the week ending June 6^th 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 21^st 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 23^rd, 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

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.

Additional Themes

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.

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.

Additional Themes

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.

Summary and Price Action Rundown

Global risk assets are mostly higher this morning amid continued optimism over economic reopening, rising oil prices following the OPEC+ agreement, and expectations for more exceptionally accommodative messaging from the Federal Reserve at this week’s meeting. S&P 500 futures indicate a 0.4% higher open, which would add to last week’s torrid 4.9% gain that cut year-to-date downside to a mere 1.4% and the decline from February’s record high to 5.7%. Equities in the EU are retracing a portion of their ongoing rally this morning, while Asian stocks also posted gains overnight. Longer-dated Treasury yields are extending their breakout from their two-month trading range, with the 10-year yield rising to 0.91%, while the dollar is continuing its downtrend. Crude oil is climbing to a new multi-month high after OPEC and its allies agreed over the weekend to extend supply cuts (more below).

OPEC+ Unites Over Further Supply Cuts

Crude oil is continuing its steep multi-month rally after OPEC and its allies (collectively known as OPEC+) agreed on Saturday to extend output curbs through July with a focus on stricter compliance. Key aspects of the deal include an agreed-upon 9.6 million barrels per day (bpd) cut through July (slightly lower than previous 9.7 million bpd due to Mexico’s withdrawal from supply cuts) and previously non-compliant countries from May and June making extra supply reductions to compensate, a point that was non-negotiable to both Saudi and Russian officials. These compensatory measures will turn investor attention towards the compliance of Iraq and Nigeria over the next few months as the primary indicator of the cohesiveness of the cartel’s agreement. The Joint Ministerial Monitoring Committee will meet again on June 18^th to continue to monitor the oil market and determine whether the cuts would need to be extended until August. Going forward, the cartel will also have to contend with two key factors that may work to counter their efforts to support prices. First is the resurgence of Libyan oil, as the ceasefire agreement has already seen the resumption of production at the war-torn country’s largest oil facilities. Second is the potential rebound in US shale oil output, with reports noting that producers are starting to undo the shut-ins that have occurred over the past few months.

Economic Data Sends Mixed Signals Over Global Recovery

As analysts continue to ponder the dramatic upside surprise in last Friday’s US nonfarm payroll figures for May, data from overseas suggests that the recovery remains fitful. Although April data may be considered somewhat stale and backward-looking, German industrial product for the month was worse than anticipated, contracting 17.9% month-on-month and 25.3% year-on-year (y/y). Automobile sales in Germany were down 50% y/y in May, though China’s car buying rebounded for a gain of 1.9% y/y. Not all the data from China was positive, however, with May exports down -3.3% y/y and imports -16.7% y/y, with the former moderately better than expected but the latter considerably weaker. However, analysts noted that the import data showed large increases in crude oil and soybean purchases, which are suggestive of compliance with Phase One trade deal commitments. Meanwhile, Japan’s revised first quarter GDP figure showed an improvement from the initial reading of -3.4% quarter-on-quarter annualized contraction to 2.2%, though economists are pointing to possible distortions in the figure based on challenging reporting conditions during the onset of the pandemic. Similarly, market participants are trying to parse the significance of the “misclassification error” disclosed by the Bureau of Labor Statistics, which led to a significant understatement of the unemployment rate in Friday’s stunning release. For context, the unemployment rate fell to 13.3% after record highs in April, well below market expectations of 19.8%. The number of unemployed persons fell by 2.1 million to 21 million. However, the real unemployment rate is another 3% higher at 16.1% due to continued misclassifications in BLS household surveys regarding temporary layoffs due to the pandemic. The challenge is the treatment of furloughed workers, who reported that they remain employed but absent at the direction of management.

Additional Themes

US Protests Remain a Backburner Issue for Markets – Despite the magnitude and societal significance of the demonstrations that continued over the weekend with a more peaceful tone than last week, there remains scant overt reaction in financial markets. Still, investors are pondering how these developments might change the outlook for November’s election.

This Week – Analysts will be highly attuned to how Chair Powell and the FOMC frame the surge in May nonfarm payrolls on Wednesday at the conclusion of the two-day Fed meeting. Aside from the FOMC, this week’s calendar is somewhat light. Initial jobless claims and continuing jobless claims will be in focus on Thursday. Consumer and producer price indexes will be noted, but are unlikely to move the market, while the consumer sentiment gauge on Friday will be salient to the assessment of the ongoing economic rebound.