Prior week summary
After experiencing a strong rally in recent weeks, the major U.S. equity indices moved lower on the week, snapping a three-week stretch of gains, as renewed fears of a second wave of COVID-19 infections dominated headlines and soured investor sentiment. As of Sunday evening, the global infection count sits just above eight million confirmed cases with India and Brazil emerging as the newest global hotspots. WHO director-general Tedros Adhanom Ghebreyesus advised caution even in areas where the virus has started to subside saying, “Our fear is although it is declining in Europe it is increasing in other parts of the world. Even Europe cannot be safe because the virus can be reintroduced to Europe.” In the U.S., many fear a second wave of COVID-19 infections is beginning as several states, including Texas, Florida, and Arizona, have seen an increased pace of infections and hospitalizations amid the reopening of their economies. The Trump administration has taken a more optimistic view, emphasizing the benefits of reopening the U.S. economy and downplaying the potential for a fresh and sustained outbreak. In an interview on Sunday, White House economic advisor Larry Kudlow said, “Although the case rate has increased a bit, we’re not talking about a second round here,” and noted, “I think there is a very good chance you are going to get the V-shaped recovery, and I think the second half of the year will be a good 20% economic growth and the unemployment rate will fall.” Treasury Secretary Steven Mnuchin also made headlines this week, suggesting that another fiscal stimulus bill is strongly being considered and that the U.S., “can’t shut down the economy again.” On Thursday, Regeneron Pharmaceuticals, Inc. announced that it began human testing of its “investigational dual antibody cocktail,” and hopes to have the drug ready for emergency use later this fall.
The FOMC held the target range steady at 0%–0.25% at the conclusion of their latest policy meeting and provided a gloomy outlook for the U.S. economy. In a statement following the release of the decision, the FOMC emphasized that the Federal Reserve will hold an accommodative stance for the foreseeable future saying, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” and noted, “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.” FOMC members showed near-unanimous consensus on where they see the path of monetary policy in the medium term with all 17 members expecting the target range to remain unchanged through 2021, and 15 of the 17 members expecting the target range to remain at current levels through 2022. Fed expectations for GDP showed a 6.5% drop for 2020, with expected rebounds of 5% in 2021, and 3.5% in 2022. Speaking on the Fed’s economic projections, Federal Reserve Chair Jerome Powell said that they were made with the, “General expectation of an economic recovery beginning in the second half of this year and lasting over the next couple of years, supported by interest rates that remain at their current level near zero.”
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on the Empire Manufacturing Index, retail sales, industrial production, housing starts, and jobless claims dotting the economic calendar.
Market implied policy path (Overnight indexed swap rates)
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