- Markets await details on Washington’s stimulus plan
- T-note yields rise sharply as market trims expectations for Fed easing for first time in 2-1/2 weeks
- Saudis go for a knock-out punch in the first round
- U.S. CPI expected little changed
- 10-year T-note auction
Markets await details on Washington’s stimulus plan — The U.S. stock market on Tuesday rebounded sharply higher by 5% on the promise by the Trump administration for an aggressive stimulus package. However, March E-Mini S&P’s faded by -1% in after-market trading when a late-afternoon press conference at the White House by top crisis officials failed to provide any stimulus details.
The markets were also a bit disappointed by reports that President Trump’s pitch to Republican Senators at a caucus lunch for a payroll tax holiday through year-end received only a mixed review. Congress would have to approve a payroll tax cut, adding to the complications of getting any deal done quickly. House Democrats have their own ideas of what should be in a stimulus package. Also, Congress is scheduled to be on recess next week.
Meanwhile, the coronavirus continues to spread in the United States. In a sign of the times, the state of New York declared a “containment area” around the city of New Rochelle and called out the National Guard, a scenario that Americans until yesterday had only seen in the movies. More schools are closing, and more companies are telling employees to work from home where possible. New York banks were busy splitting staffs into separate groups and having them work different shifts or in different locations.
There was at least some good news that U.S. testing is on the rise, which will help the markets better estimate the scale of the problem. In addition, there were only 19 new cases of the virus on Monday announced in China, which raised hopes that the virus can be mitigated with enough effort.
Still, the scale of the U.S. business disruptions and the hit to corporate earnings remains impossible to predict and the stock market may yet be far too optimistic about the eventual impact of the pandemic.
The S&P 500 index (SPX) on Tuesday edged to a new 9-1/4 month low where the index corrected lower by a total of -19.4% from the mid-February record high. However, SPX then staged a recovery rally and closed the day up 4.94%, recovering more than half of Monday’s -7.60% meltdown. The VIX S&P 500 Volatility Index on Tuesday fell back from Monday’s 11-1/4 year high of 62.12 and closed the day -7.16 at 47.30.
T-note yields rise sharply as market trims expectations for Fed easing for first time in 2-1/2 weeks — The 10-year T-note yield on Tuesday rebounded sharply higher from Monday’s record low of 0.31% and closed the day up +26 bp at 0.80%. The T-note yield rose as stocks staged a recovery rally, which slightly reduced the pressure on the Fed to cut rates. Also, the Treasury market is well aware that it will be financing any stimulus program that Washington concocts, which will undoubtedly run into the billions of dollars.
The Dec 2020 federal funds futures contract on Tuesday rose by +6.5 bp to 0.190%, breaking the string of 13 consecutive sessions during which expectations accelerated for Fed easing. The market is now discounting 93.5 bp of Fed easing through year-end (3.7 rate cuts), a bit less than Monday’s expectations of 100 bp.
Saudis go for a knock-out punch in the first round — April WTI crude oil on Tuesday closed sharply higher by +$3.23 (+10.38%) at $34.36, recovering at least some of Monday’s -24.6% plunge.
Crude oil prices on Tuesday rallied as governments around the world promised fiscal stimulus programs, which should provide some support for economic growth and energy demand. Oil prices also recovered somewhat as the markets have doubts about how far Saudi Arabia is willing to go to punish Russia for refusing its demand for a further production cut.
Russia on Tuesday showed some flexibility when it said that the door is not completely closed to cooperation with OPEC. However, Saudi Arabia showed they intend to inflict some major punishment for at least a number of weeks. Aramco on Tuesday announced that it plans to quickly ramp up sales in April to 12.3 million bpd from 9.7 million bpd in March. Since that is higher than its near-term production capacity, Saudi Arabia apparently plans to open the spigots on some of the oil that it has in storage. Russia responded with a smaller counterpunch by saying it plans to ramp up production by 200,000-300,000 bpd quickly and eventually by 500,000 bpd.
Saudi Arabia’s hard punch for April suggested that it is more interested in bringing Russia to heel on a new production cut agreement than engineering a long-term strategic rise in its production and forcing oil prices down to the $20’s or lower for coming years.
U.S. CPI expected little changed — The consensus is for today’s Feb CPI to ease to +2.2% y/y from Jan’s +2.5%, while the core CPI is expected to be unchanged at +2.3% y/y. Today’s CPI report may only be a quaint reminder of times gone by considering that the 10-year breakeven inflation expectations rate this week has plunged to 1.03%, which, if true, would put the Fed in the predicament of facing near deflation for the next decade.
10-year T-note auction — The Treasury today will sell $24 billion of 10-year T-notes, which closed at a yield of 0.80% yesterday. The Treasury will then wrap up this week’s $78 billion coupon package by selling $16 billion of 30-year bonds on Thursday. The 30-year yield yesterday closed at 1.28%.
