- Stocks come roaring back on virus-response and politics
- Bullard says don’t expect another rate cut at FOMC meeting in two weeks
- Russia resists production cut at this week’s OPEC+ meeting
- Claims report will be watched for signs of virus-related layoffs
- U.S. factory orders expected to be weak
Stocks come roaring back on virus-response and politics — The S&P 500 index on Wednesday came roaring back from Tuesday’s loss of -2.81% and closed the day sharply higher by +4.44%, closing just below Tuesday’s 1-week high.
Bullish factors for U.S. stocks on Wednesday included (1) the Bank of Canada’s -50 bp rate cut to 1.25% and expectations for rate cuts from other key central banks following the Fed’s -50 bp emergency rate cut on Tuesday, (2) the passage by the House of an $8.3 billion virus-response bill, (3) stronger-than-expected Feb U.S. economic reports with ADP jobs up +183,000 and the ISM non-manufacturing index up +1.8 at a 1-year high of 57.3, and (4) a rally in health care stocks after Joe Biden racked up some surprising primary victories on Super Tuesday against Bernie Sanders, who favors Medicare for All that would essentially eliminate private health insurers and managed care providers.
There was also talk that the Bank of England may announce an emergency rate cut before its regularly scheduled meeting on March 26.
Despite Wednesday’s rally, the stock market remains highly volatile as it tracks coronavirus news. An increasing number of public events are being canceled and businesses are cutting back on travel. There now seems to be little likelihood that the coronavirus can be completely stamped out. The world may have to just try to minimize the impact of the coronavirus until a vaccine can be developed.
Bullard says don’t expect another rate cut at FOMC meeting in two weeks — St. Louis Fed President James Bullard (non-voter), one of the most dovish FOMC members, essentially told the markets yesterday in a Bloomberg TV interview not to expect another rate cut at the FOMC meeting in 1-1/2 weeks on March 17-18. He said, “I think we have got the policy rate at the right place for now. It’s unlikely we are going to have that much different information when we get to the March meeting. I am not sure you should put a lot of weight on the March meeting right now.”
The markets are nevertheless discounting a strong chance of a -25 bp rate cut at the FOMC meeting in 1-1/2 weeks. If there is no rate cut at the March meeting, then the market is fully discounting that -25 bp rate cut at the following meeting on April 28-29.
The federal funds futures market on Wednesday boosted expectations for further Fed easing by year-end by another 7 bp to 71.5 bp, which is equivalent to 2.9 rate cuts. Specifically, the Dec 2020 federal funds futures contract on Wednesday fell by 7 bp to a yield of 0.41%, reflecting expectations for a -71.5 bp cut in the funds rate from the current target mid-point of 1.125%.
The markets suspect that after this year’s expected rate cuts, the Fed in 2021 and 2022 will then leave policy essentially unchanged with the funds rate in the area of 0.40-0.50%.
The 10-year T-note yield on Wednesday rose by +5.3 bp to 1.052% as the stock market rallied and as concerns eased a bit about the coronavirus. The 10-year yield on Wednesday remained above Tuesday’s record low of -0.904%.
The 2-year T-note yield, by contrast, fell to a new 3-3/4 year low of 0.608% on Wednesday and closed the day down -0.7 bp at 0.693%.
Russia resists production cut at this week’s OPEC+ meeting — Russia at preliminary OPEC+ meetings on Wednesday refused to agree to any OPEC+ production cut for Q2. However, the full 2-day ministerial meeting begins today and Russia may yet be corralled into a production cut.
The OPEC+ Technical Committee is recommending an additional production cut for Q2 of between 600,000 bpd and 1.0 million bpd. Meanwhile, there were reports on Wednesday that Saudi Arabia is calling for an additional production cut of as much as 1.5 million bpd.
Claims report will be watched for signs of virus-related layoffs — The markets will be watching today’s unemployment claims report for the week ended Feb 28 for any sign of an uptick in initial unemployment claims. The markets are waiting to see if businesses start to lay off employees due to a slump in business from the coronavirus.
The initial claims series has so far shown no major upside movement and is only 26,000 above the 50-year low of 193,000 posted in April 2019. The continuing claims series is 82,000 above the 46-year low of 1.642 million posted in November 2019.
Yesterday’s Feb ADP report of +183,000 was stronger than market expectations of +170,000 and suggested that business hiring has not yet slumped in response to the coronavirus. However, the jobs figures lag the business cycle and an expected slump in hiring may not show up until the March and April jobs reports. The consensus is for Friday’s Feb payroll report to show an increase of +175,000, down from Jan’s strong report of +225,000.
U.S. factory orders expected to be weak — The consensus is for today’s Jan factory orders report to show a decline of -0.1% after December’s report of +1.8% and +0.6% ex-transportation. Factory orders have fallen on a year-on-year basis for the last five reporting months (Aug-Dec), which is another indicator of the fact that the U.S. manufacturing sector was in a recession even before the coronavirus hit. A hit to factory orders from the coronavirus is likely to start showing up in next month’s report for February.
