Prior week summary
Despite the ongoing deluge of weak domestic economic data, the major U.S. equity indices moved higher on the week, snapping a two-week streak of losses, as optimism grew over the prospects of effective COVID-19 treatments and vaccines. Market participants were encouraged throughout the week by positive developments in the global race for effective COVID-19 treatment options. On Thursday, the biotechnology company, Moderna, announced that it received approval from the Food and Drug Administration (FDA) to conduct phase two trials for its prospective vaccine after displaying encouraging results in the phase one trial. Several other vaccine options are in the works with the University of Oxford hoping to have the ability to evaluate its vaccine by June, and Pfizer entering phase one clinical trials on its prospective vaccine this week. After receiving an Emergency Use Authorization from the FDA last week, Gilead Science’s antiviral drug, remdesivir, was authorized for use on patients with severe COVID-19 infections in Japan. Only the U.S. and Japan have authorized the use of remdesivir thus far. As of Sunday evening, the global infection count has topped four million with nearly 300,000 people succumbing to the virus. The U.S. continues to lead the world in the number of cases, but a significant outbreak in Russia has seen the country become the third-most infected nation globally by case count with infections increasing by approximately 55% since last Sunday.
While record-breaking job losses were expected to be reported in the April non-farm payroll report, the release still managed to turn heads as the U.S. economy shed 20.5 million jobs in April, far more than any prior monthly drop, and drove the unemployment rate to 14.7%, the highest since the Great Depression. The leisure and hospitality industry were hardest hit, suffering from the strict lockdowns imposed by state and local governments across the country attempting to slow the spread of the virus, but every industry measured shed jobs in April. Many have warned that the unemployment situation will continue to worsen as another 3.17 million people filed for unemployment in the last week, off the peaks of last month but over 4.5 times higher than the pre-COVID-19 record set in 1982. Speaking about the unemployment situation on Sunday, Treasury Secretary Steven Mnuchin warned that, “the reported numbers are probably going to get worse before they get better,” and noted, “This is no fault of American business, this no fault of American workers, this is a result of a virus. You’re going to have a very, very bad second quarter.” All eyes turned to the Fed Funds futures market on Thursday when contracts for December 2020 began trading above par, implying a negative Federal Funds Effective Rate, despite the Federal Reserve’s perceived unwillingness to take rates negative. Many analysts were quick to point to their belief that it was technical flows and market imbalances that drove the prices above par, rather than an actual expectation for negative rates. Speaking on the possibility of negative rates, Richmond Federal Reserve President Thomas Barkin said, “I think negative interest rates have been tried in other places, and I haven’t seen anything personally that makes me think they’re worth a try here.”
The look forward
Market participants are gearing up for a busy week of economic data releases as updated figures on the Consumer Price Index, the Producer Price Index, retail sales, the Empire Manufacturing Index, jobless claims, and industrial production, among others, dot the economic calendar.
Market implied policy path (Overnight indexed swap rates)
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