FOMC leaves target range unchanged; beleaguered stocks rally

Prior week summary

In a wild week for equity markets, the major U.S. equity indices finished the week lower amid mixed economic data, dovish comments from the Federal Reserve, sustained decline in daily COVID-19 case counts, and a social-media-driven run-up in some of the most heavily shorted stocks in the U.S. equity markets. U.S. equity markets gained global attention last week as several heavily shorted equities saw their stock prices soar as members of a Reddit message board and other online forums launched a coordinated effort to drive prices higher. The movement gained popularity throughout the week and led to unprecedented volume in the chosen stocks and drove many brokerages to limit stock purchases in certain securities causing a social media backlash. Last week also saw fiscal stimulus negotiations heat up. After President Joe Biden tabled a $1.9 trillion relief proposal in early January, Democratic leaders in both chambers of Congress announced plans last week to move forward with elements of President Biden’s proposal as early as next week. On Sunday, a group of ten Republican Senators sent a letter to President Biden detailing an alternative $600 billion proposal in hopes of reaching an agreement that could pass through both the House of Representatives and the Senate via traditional means. The latest proposal would include $160 billion in funds for vaccine development and distribution, an extension to the enhanced unemployment benefits, and direct payments to qualifying individuals. Brian Deese, director of the National Economic Council, spoke to reporters on Sunday and indicated that the White House is reviewing the letter and is open to negotiations saying, “We welcome input to say where we may have not gotten everything right, where we could be more effective, certainly that's part of the process as we go forward. But what we really need to focus on now is what do we need to get this economy back on track and what are the resources necessary to do so,” but emphasized that President Biden is, “uncompromising when it comes to the speed we need to act at to address this crisis.”

As COVID-19 continues to spread across the country, market participants were encouraged last week as the pace of new infections continued to decline in the U.S. After the daily infection count seven-day average reached a pandemic-high 246,321 cases on January 11, the seven-day average has continued its decline and sat at 152,262 cases on Friday, the lowest level seen since mid-November. COVID-19 vaccinations, however, have been steadily increasing in recent weeks. As of Sunday, the Centers for Disease Control and Prevention reported that 31.1 million vaccines have been administered in the U.S., suggesting that approximately 9% of the U.S. population has received at least one dose of a vaccine compared to 6.6% of the population last week. The pace of vaccinations has also picked up over the last week with approximately 1.7 million doses administered on Saturday compared to the 1.4 million doses administered the prior Saturday. The increase in vaccinations comes as additional vaccines are nearing approval for use. On Friday, Johnson & Johnson announced that its prospective vaccine is 66% effective, 28 days after inoculation, in preventing moderate and severe cases of COVID-19. Notably, the Johnson & Johnson vaccine requires only one shot, one fewer than the approved Pfizer and Moderna vaccines. In a statement announcing the results, Johnson & Johnson indicated that they plan to file for an Emergency Use Authorization (EUA) shortly saying, “The Company intends to file for the U.S. EUA in early February and expects to have product available to ship immediately following authorization,” and noted, “The Company’s anticipated manufacturing timeline will enable it to meet its 2021 supply commitments, including those signed with governments and global organizations.”

In a light week for economic data releases, the updated figures largely pointed to a mixed U.S. recovery. Fourth-quarter GDP clocked in at 4% for the first reading, bringing 2020 GDP to a 3.5% decline. The Federal Reserve Bank of Atlanta’s GDPNow tool, which attempts to forecast the current quarter’s GDP in real-time, currently projects first-quarter GDP will rise at a 5.2% pace. The Chicago Purchasing Managers Index smashed expectations posting a 63.8 level, well above analyst calls for a 58.7 reading and the 59.5 level seen in December. Durable goods orders fell sharply below expectations to 0.2% in December. Jobless claims are beginning to fall after seeing a notable spike in recent weeks. 847,000 individuals filed for unemployment last week, below the 875,000 consensus estimate and the 914,000 claims seen the week prior. Continuing claims also moved lower to 4.77 million compared to the 4.97 million claims seen the week prior. The FOMC held its first monetary policy meeting of the year on Tuesday and Wednesday of last week. As expected, the FOMC held the target range steady at 0.00%–0.25%. Speaking to reporters after the announcement, Federal Reserve Chair Jerome Powell looked to quell fears that the Federal Reserve would taper asset purchases in the near future saying, “The whole focus on exit is premature if I may say. We’re focused on finishing the job we’re doing, which is supporting the economy, giving the economy the support it needs”, and reiterated that the Federal Reserve would allow inflation to run above 2% for some time saying, “We’re going to be patient. Expect us to wait and see and not react if we see small, and what we would view as very likely to be transient, effects on inflation.”

The look forward

This week brings a host of economic data releases with updated figures on the ISM Manufacturing Index, the ISM Non-Manufacturing Index, factory orders, jobless claims, and the January non-farm payroll report, among others, dotting the economic calendar.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)