Just A Bucket Of Ice

Just a bucket of ice.  Stocks sold off for a second straight session as traders began to fear that a recovery might take a bit longer than they originally hoped. Fed Chairman Jerome Powell raised a warning that the country’s economic outlook is highly uncertain, requiring more stimulus.

 N O T E W O R T H Y

They may be onto something.  I have been reporting about the Fed Funds futures going negative in recent notes. Remember back to the last recession?  Things were tough and it affected virtually everyone in all walks of life as the troubles were compounded by a global financial crisis.  That looks bad even when you read it, but compared to the current crisis, the Great Recession can almost be remembered as the “good old days”.  All chuckling aside, the last recession was a bad one and required the Fed to use tools that it never had before, sparking the creation of a new set of abbreviations which are now commonplace.  To conquer the economic slowdown, the Fed adopted ZIRP and QE, while the Federal Government introduced TARP.  If you don’t know, those stand for Zero Interest Rate Policy, Quantitative Easing, and Troubled Asset Relief Program.  I want to focus on ZIRP for now as it has been front and center recently. Zero, or near-zero interest rates were historically quite rare.  Fed Funds did briefly hit some near-zero lows during recessions in the 1950’s and 1960’s but a policy of keeping them low for a long period of time really came of age in the last recession, where the policy was often referred to as “unprecedented”.  The Fed managed to shift its stance and started to raise rates in late 2015 as the economic recovery began to bloom, even though the recession technically ended in 2009 almost 3.5 years earlier. The economic recovery around the globe was unfortunately not as robust as in the US, forcing some central bankers to turn to NIRP.  That’s right Negative Interest Rate Policy, where as its name implies, you actually pay someone to borrow your money. Terrible for savers but a windfall for borrowers.  Easy money should, in theory, cause consumers and companies to buy more, leading to economic growth.  Of course, there are costs such as declines in bank revenue and a massive withdrawal of savings, to name but a few.  Further, one would be hard pressed to find a success story about NIRP.  Japan introduced NIRP in March 2016 and since then the Nikkei 225 Index rose by only +26% compared to the S&P500 growth of +42% over the same period. Furthermore, Japan’s Debt to GDP ratio has ballooned to around 237% compared to the US, which has 107% ratio.  The ECB has also adopted NIRP, and well, you know how that is going. For all of these reasons and many more, the Federal Reserve has been adamant that it would not consider negative interest rates. Fed Funds futures traders, however don’t agree and recently, for the first time, pushed future interest rates below zero sometime in 2021.  That means they are betting that the Fed will have to lower the funds rate below zero.  Yesterday, Chairman Powell reiterated that the Fed is not considering the policy while cautioning that the road to recovery may be longer than expected.  Further, he emphasized that additional economic stimulus would be necessary for recovery.  He said “…the Fed has lending powers, but not spending powers”, implying that it would be up to lawmakers to ensure the recovery. The House is due to vote on the next wave of stimulus proposed by House Democrats amounting to some $3 trillion in additional funds.  If passed the Senate would have to approve it and Senate Republicans have already declared it dead on arrival.  With a low likelihood of agreement on additional spending in the near future, traders who bet on NIRP may find their wagers in the money.  Let’s hope not.

THE MARKETS

Stocks sold off yesterday on pre-market comments made by Fed Chairman Jerome Powell.  The Chairman warned that there was significant uncertainty in the economic recovery and that more stimulus might be needed to get things back on track.  Traders were hoping for a “economy is doing great and we will do whatever it takes to help” speech, but his comments came up short spurring a selloff.  The S&P500 dropped by -1.75%, the Dow Jones Industrial Average fell by -2.17, the Russell 2000 sank by -3.32%, and the Nasdaq Composite Index traded off by -1.55%.  Bonds advanced and 10-year treasury yields fell by -4 basis points to 0.61%.

NXT UP

- Weekly Initial Jobless Claims (May 9) are expected to come in at 2.5 million, down from last week’s 3.169 million first-time claims.

- Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael Bostic, and Dallas Fed's Robert Kaplan will speak today.

- This morning Norwegian Cruise Lines beat estimates and we will hear from VF Corp after the bell.

daily chartbook 2020-05-14