Will FOMC Meeting Upset the Equity Rally?
This week’s FOMC Meeting won’t lead to any monetary policy changes but the most important piece of information is likely to come from the post-meeting press conference where Fed Chair Powell is likely to be asked about what other measures might be employed from here. The answer will probably be the continued use of quantitative easing and perhaps some discussion of Yield Curve Caps. This is the action of targeting a rate ceiling (say, 1.25% on the 10yr) and buying enough to prevent the yield from breaching that level. The Japanese have successfully done this in their policy regime, and it could be the next step for the Fed and something they will try long before negative rates, which we suspect Powell will be asked about again but will deftly swat it away like usual. Away from the Fed meeting the other big market moving items are the troika of reopening news, US/China trade relations, and new long-end Treasury supply. As for any new fiscal stimulus, the upbeat jobs report probably puts a nail in that coffin for awhile and that probably sets the course for some pretty brutal job and operational cuts at the state and city level. Remember, even with the surprising job gains unemployment is still running at 13% (and more likely 16% given erroneous survey responses), and that number is likely to increase from upcoming state and local job cuts.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||0.31%|
|6 Mo LIBOR||0.48%|
|12 Mo LIBOR||0.63%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Jun 9||JOLTS Job Openings||Apr||5.875mm||5.750mm||6.191mm|
|Jun 10||CPI MoM||May||0.0%||0.0%||-0.8%|
|Jun 10||CPI Ex-Food & Energy MoM||May||0.0%||0.0%||-0.4%|
|Jun 10||CPI Ex-Food & Energy YoY||May||1.3%||1.3%||1.4%|
|Jun 10||FOMC Rate Decision||Jun 10||0.00%-0.25%||0.00%-0.25%||0.00%-0.25%|
|Jun 11||Initial Claims||Jun 6||1.575mm||1.550mm||1.877mm|
|Jun 11||PPI Ex Food & Energy YoY||May||0.5%||0.5%||0.6%|
|Jun 12||U. of Mich. Sentiment||Jun P||75.0||75.0||72.3|
|Jun 12||U. of Mich. Expectations||Jun P||NA||NA||82.3|
Top 5 Events for the Week
June 8— 12, 2020
1. FOMC Meeting — Wednesday
2. Reopening/US-China Developments — All Week
3. U. of Michigan Consumer Sentiment — Friday
4. May Inflation Readings — Wednesday/Thursday
5. Initial and Continuing Claims — Thursday
1. FOMC Rate Decision and Meeting – Wednesday
This week’s FOMC Meeting won’t lead to any changes in monetary policy but the most important piece of information is likely to come from the post-meeting press conference where Fed Chair Powell is likely to be asked about what other measures might be employed from here. Most likely the answer will be the continued use of quantitative easing and perhaps some discussion of Yield Curve Caps. This is the action of targeting a rate ceiling (say 1.25% on the 10yr) and buying said security in enough quantity to prevent the yield from breaching that level. The Japanese have successfully done this in their policy regime and it’s the likely next step for the Fed and something they will do long before negative rates, which we suspect Powell will be asked about again but will deftly swat it away like usual. With the surprisingly strong jobs report, the Fed is not likely to advance any additional policy steps on Wednesday but that doesn’t mean questions won’t be asked and answered.
2. Reopening/US-China/Congressional Action – All Week
Away from the Fed meeting the other big market moving items are the troika of reopening news, US/China trade relations, and the outlook for additional fiscal stimulus. On that last item, the upbeat jobs report probably puts a nail in the coffin for any new stimulus bill for at least a month and that probably sets the course for some pretty brutal job and operational cutbacks on the state and city level. Remember, even with the surprising jobs numbers unemployment is still running at 13% (and more likely 16% given erroneous survey responses), and that number is likely to be added to by state and local job cuts. Meanwhile, the market will be attuned to additional reopening news and risk-on markets are likely to look past any downbeat information and focus on the positive. That means more stock gains are likely while Treasuries remain under some pressure. And while the jobs report couldn’t lift 10yr yields over 1.00% new supply coming to market this week could do the trick.
3. U. of Michigan Preliminary June Consumer Sentiment – Friday
With the consumer playing such a pivotal part in our economy, gauging their sentiment is crucial to determining how likely they are to come out of corona-induced hiding and venture into the gradually reopening society. For June, expectations are for sentiment to increase slightly from 72.3 to 75.3 while expectations are hoping to improve from the 65.9 reading in May, which was the lowest since 2013. Given the solid May jobs report, and the rampaging stock market, it’s very likely sentiment numbers could surprise to the upside and provide further fuel for the stock rally and headwinds for fixed income.
4. May Inflation Readings — Wednesday/Thursday
Inflation has been mentioned as a latent threat given all the stimulus provided to the economy and monetary accommodation provided by the Fed, and certainly if we get a V-shaped recovery it could come sooner than later, but for now, it’s pretty much a dead subject and will likely continue to be for many more months. Exhibit A in the case of quiescent inflation is the expectations for May. Overall CPI is expected to be flat versus a –0.8% decline in April. The core CPI (ex-food and energy) is expected to also be flat compared to a –0.4% drop in April. YoY CPI is expected to be 0.3% matching the prior month’s result. Core CPI YoY is expected to be 1.3% versus 1.4% in April. So like we said above, inflation may be something to expect at some point but that’s probably next year’s story not in 2020.
5. Initial and Continuing Jobless Claims – Thursday
Weekly jobless claims continue to provide the most immediate read on the impact of the economic shutdown. The expectation for this week is for 1.55 million additional jobless claims. The high for claims was 6.9 million on April 4. Cumulative claims have now reached 44 million over the last ten weeks while continuing claims are just over 21 million, which is more indicative of the current number of insured unemployed. In any event, with continuing claims over 21 million, its very odd that the BLS had just 20 million unemployed as typically there are millions more unemployed but not eligible for unemployment insurance (see graph below). Oh well, something to consider when we get closer to the June employment report.