- Weekly market focus
- Powell and other Fed officials this week are likely to reiterate their recent themes
- Stock market worries about possible second pandemic waveÂ
- EU-UK officials meet today to kick off the 5-week negotiating marathon
Weekly market focus — The U.S. markets this week will focus on (1) the extent to which there might be a resurgence of the pandemic in the U.S., (2) Fed Chair Powell’s testimony to Congressional committees on Tuesday and Wednesday, (3) the Treasury’s sale of 20-year T-bonds on Wednesday and 5-year TIPS on Thursday, and (4) a fairly busy economic calendar with the highlight being Tuesday’s May retail sales report (expected +8.0% m/m) and May manufacturing production report (expected +5.0% m/m).
In Asia, the Bank of Japan at its meeting on Tuesday is expected to leave its monetary policy unchanged. The Asian markets will also watch for any new US/Chinese tensions over trade, tech companies, or Hong Kong.
In Europe, Brexit will be in the news with today’s meeting between UK Prime Minister Johnson and top EU officials. The Bank of England at its policy meeting on Thursday is expected to boost its QE program by 100 billion pounds.
The EU holds a summit on Thursday and Friday where the focus will be on whether there is an agreement on the proposed 750 billion euro bailout package.
Powell and other Fed officials this week are likely to reiterate their recent themes — This is a busy week for Fedspeak with Fed Chair Powell delivering his semi-annual testimony on the economy to Congressional panels on Tuesday and Wednesday. However, Mr. Powell just gave a press conference after last Wednesday’s FOMC meeting and he is likely to reiterate the same themes at his appearance this week. Mr. Powell, along with Cleveland Fed President Mester, will also take park in a virtual conference on Friday on the topic of the labor market. There are six other appearances by various Fed officials this week.
The markets reacted dovishly to last week’s FOMC meeting because the Fed unexpectedly said that it would stop tapering its securities purchases and peg its new QE program at $120 billion per month for the indefinite future ($80 billion of Treasury securities and $40 billion of MBS securities). The Fed’s current QE program is far larger than any of the QE programs that it ran in the aftermath of the Great Recession. The markets were also encouraged by last week’s Fed-dot forecast that the funds rate will remain at its current near-zero level at least through the end of 2022.
Stock market worries about possible second pandemic wave — The stock market last week fell sharply by a net -4.78% on long liquidation pressure sparked by concern about the recent uptick in coronavirus infections as states reopen. The markets are worried that the increased infection rates will force some areas to close back down, or at least slow their reopenings.
Houston officials last Thursday, for example, said that the city is on the “precipice of disaster” and that they are getting close to reimposing a stay-at-home order. There are record numbers of new Covid-19 cases in Arizona, Oklahoma, Arkansas, and North Carolina.
The U.S. continues to lead the world by far with the most Covid-19 deaths with 115,206, according to Johns Hopkinds. The U.S. is followed by Brazil with 41,282 deaths, the UK with 41,747 deaths, Italy with 34,301 deaths, France with 28,401 deaths, Spain with 27,136 deaths, and Mexico with 16,448 deaths. Globally, there have been 7.7 million confirmed cases of Covid-19 and 427,800 deaths.
The increased infection figures are not due solely to increased testing as claimed by some state officials since hospitalizations are rising as well. In Arizona, the hospital system Banner Health last week said that the number of Covid-19 patients on ventilators had quadrupled in the past four weeks.
U.S. officials and the U.S. public in general do not seem willing to accept a return to aggressive lockdowns. That suggests that the U.S. will just have to muddle through with a medium-level of Covid-19 infections and deaths until a vaccine becomes widely available. A medium-level infection rate suggests that the U.S. economy will not be able to fully reopen until at least next year as limits continue to be imposed on large group gatherings and some businesses. In the meantime, the U.S. businesses that can survive will have to do so with reduced sales and profits.
EU-UK officials meet today to kick off the 5-week negotiating marathon — UK Prime Minister Boris Johnson will hold a teleconference today with European Commission President Ursula von der Leyen and other top European officials.
The goal will be to inject some political momentum into the recent trade talks, which have been deadlocked. UK and EU officials have agreed to hold five straight weeks of talks starting later this month. If there is no agreement by the end of those five weeks, then the chances will be substantially reduced for a deal by year-end since a deal has to be wrapped up in time for it to be ratified at the national level by all the EU countries.
The UK is calling on EU countries to revise the EU negotiating mandate since the UK sees no room for a deal under the current mandate which calls for (1) a level playing field where the UK complies with some EU standards and regulations, (2) broad EU access to UK fishing waters, and (3) a dispute resolution process.
The UK last Friday again ruled out the possibility of extending the transition beyond the end of this year. Without a trade deal or transition extension, there will be a no-deal Brexit at year-end with hard borders and a reversion to WTO tariffs.
