The Fed probably didn’t intend to set in motion a risk-off trade after it’s Wednesday meeting but that’s what happened after investors had an evening to digest the Fed’s concerns that flowed through their forecasts, the first since December, and in some post-meeting comments. Rising case counts in several states raised concerns too that a second wave was arriving sooner than expected. The dual impact of a cautious Fed and renewed virus fears has stocks in full retreat while bonds rallied back to near multi-month low yields. The Fed’s economic forecast seemed reasonable enough with GDP ranging from –6.5% this year, 5.0% next year and 3.5% in 2022, and unemployment trending down to 5.5% by year-end 2022. The rate forecast, however, showed no hikes through 2022 and that signaled to the market the Fed’s deep concerns for the economic damage that will take years, not quarters, to repair. Powell’s comment that the May jobs report, strong though it was, is a drop in the bucket didn’t help the risk-on mood either. So, while stocks regaled themselves with news of reopenings and visions of a V-shaped recovery, the Fed’s more sober concerns and fears of a second wave were too much to ignore. So, the stock correction is on, and bonds could venture back to range low yields, which for the 10-year Treasury is 0.54%, not far from the current 0.70%.
In their two-month rally, equities retraced all but the final 5% of the 37% drop that occurred in February and March. Treasuries, meanwhile, had spent the last two months range-bound, but last week after the surprisingly strong jobs report the 10-year looked like it was breaking above the range and setting its sights on 1.00%. It got to 0.95% in the post-jobs report trading but as 1.00% approached buyers stepped in and overseas buyers followed on Monday and the bond rally hasn’t stopped since. The Fed’s sober outlook and rising virus case counts have finally turned equity traders cautious and that new risk-off tone has boosted the Treasury bid. The graph below traces the 10-year Treasury yield since the beginning of the year.
As shown, the 10-year Treasury yield approached 1.00% last Friday, but since then buyers have stepped in and the yield has dropped back into the range that has persisted since April. This persistent range-bound trend reflects a more circumspect view of the economic recovery and one that the Fed, apparently, agrees with for now.
Univ. of Michigan Consumer Sentiment Expected to Hold Above April Low
With all eyes on the consumer and how eagerly they step back into the reopening economy, the June read on the consumer sentiment from the University of Michigan is expected to rise ever-so-slightly from April’s low of 71.8 and May’s 72.3 to 75 for June. If that comes to pass it is yet another indicator that April marked the low for the downturn. The one fly in the ointment to an increasingly confident consumer is the spike in virus case counts in several states following reopenings and Memorial Day weekend gatherings. The stock market has taken notice, and while those increasing case counts might have occurred too late to impact this month’s confidence readings they will bear watching for July.
Continuing Claims Ebb Lower
The jobless rolls in the US shrank for the second time in the last three weeks in a sign more people are returning to work, even as 1.5 million more Americans filed for unemployment benefits. Continuing claims, which tally Americans’ ongoing benefit claims in state programs, fell from 21.3 million to 20.9 million for the week ended May 29. That grudging drop in continuing claims suggests the job market is slowly recovering as businesses reopen. Analysts had expected continuing claims to dip to 20.00 million but with numbers that large anything close is a win, and the fact it represents the second drop in the last three weeks points to a possible trend developing. The insured unemployment rate fell to 14.4% after ticking up to 14.6% the prior week.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.16%||+0.02%||1 Mo LIBOR||0.19%||+0.02%||FF Target Rate||0.00%-0.25%||3 Year||0.276%|
|6 Month||0.18%||+0.02%||2 Mo LIBOR||0.32%||-0.04%||Prime Rate||3.25%||5 Year||0.376%|
|2 Year||0.19%||-0.01%||6 Mo LIBOR||0.43%||-0.05%||IOER||0.10%||10 Year||0.689%|
|10 Year||0.70%||-0.10%||12 Mo LIBOR||0.65%||-0.03%||SOFR||0.08%|