Powell reaffirms commitment to accommodative policy stance

Prior week summary

Despite the expectation of additional fiscal stimulus and dovish comments from the Federal Reserve Chair, the major U.S. equity indices pulled back last week amid weak economic data, rising COVID-19 cases globally, and the continued emergence of new COVID-19 variants. As of Monday evening, the global tally of COVID-19 cases is approaching 100 million, clocking in at just under 95.8 million cases, with over two million individuals succumbing to the virus worldwide. After the seven-day average of U.S. daily cases had accelerated upward for most of December and the beginning of January, cases have moderated somewhat with the seven-day average of daily cases now sitting at approximately 214,000 cases per day. While cases are declining over the short term, the seven-day average case count as of Monday evening is nearly three times higher than the peak seen over the summer. Contrary to the decline seen in the number of new cases, deaths have unfortunately been on the rise with the seven-day average daily death toll sitting just over 3,300, a pandemic record. Incoming CDC Director, Rochelle Walensky, warned of a rocky road ahead as the winter presses on saying, “By the middle of February, we expect half a million deaths in this country. And we still yet haven’t seen the ramifications of what happened from the holiday travel, from holiday gathering, in terms of high rates of hospitalizations and the deaths thereafter.”

On Thursday, President-elect Joe Biden announced plans for a $1.9 trillion stimulus package, which follows the $2.3 trillion COVID-19 relief and federal spending bill signed into law at year-end. The proposed package includes $1,400 direct payments to qualifying individuals, $440 billion in assistance to businesses, and $415 billion in funds designed to aid in the fight against COVID-19. In an address announcing the proposal, President-elect Biden stressed the need for additional stimulus saying, “We have to act and act now. This is what the economists are telling us. More importantly, it is what the values we hold in our hearts as Americans are telling us. A growing chorus of top economists agree that, in this moment of crisis, with interest rates at historic lows, we cannot afford inaction.” A host of Federal Reserve officials, including Federal Reserve Chair Jerome Powell, spoke this week and in a mostly unified fashion, stated that the central bank does not plan to raise the target range in the near-term and a tapering of asset purchases is not on the horizon. Speaking at a web symposium with Princeton University on Thursday, Chair Powell looked to quell any fears of a pullback in the central bank’s support noting that the state of the U.S. economy is “far from our goals,” and that “We’ll let the world know. We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases.”

Market participants were the beneficiaries of a deluge of economic updates over the week that largely pointed to a sluggish U.S. recovery. The December retail sales figure dominated headlines on Friday after it was reported that retail sales declined 0.7% in December, the third straight month of declines. The November figure was also revised lower to -1.4%. Analysts were quick to note that while COVID-19 restrictions played a role in the fewer sales, spending at online retailers also moved lower in a meaningful way. Updates for the manufacturing sector sent conflicting signals. Industrial production surprised significantly to the upside, increasing 1.6% in December, far above consensus expectations calling for a 0.5% increase. The Empire Manufacturing Index didn’t produce as much optimism, logging a 3.5 level in January, well below analyst calls for a 6.0 level and below the 4.9 level seen in December. Inflationary pressures look to have solidified somewhat but remain muted. Wednesday’s release of the Consumer Price Index (CPI) indicated that prices rose 0.4% in December, above analyst expectations and the 0.2% increase seen in November. The Core CPI measure, which notably excludes food and energy prices, rose 0.1% in December, below the 0.2% increase seen in November. The labor market continues to show weakness with 965,000 individuals filing for unemployment in the last week, well above the 784,000 claims filed the week prior and consensus estimates calling for 800,000 claims. Continuing claims also moved higher over the week, with 5.27 million individuals continuing to receive unemployment benefits, approximately 200,000 more individuals than reported the week prior.

The look forward

In a holiday-shortened week, market participants are looking forward to the release of updated figures on jobless claims, housing starts, existing home sales, and the Philadelphia Fed Business Outlook Survey, among others. All eyes will turn to Washington on Wednesday when President-elect Joe Biden is sworn in as the 46th President of the United States.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)