Sobering Thoughts: Powell Testimony, More Initial Jobless Claims Put Market on the Back Foot

Worse-than-expected weekly jobless claims numbers underscore sobering commentary yesterday from Fed Chairman Jerome Powell.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Bank earnings weak.
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Key Takeaways

  • Government figures show 2.981 million initial jobless claims in the latest week

  • Powell says economic recovery is “highly uncertain and subject to significant downside risks”

  • Cisco Systems beats estimates on both top and bottom lines

(Thursday Market Open) Wall Street seems to still be on edge a day after sobering commentary from the Federal Reserve chief sent the market lower.

Commentary from Fed Chairman Jerome Powell was a stark reminder that even though stocks have rallied from coronavirus-induced lows, the economy may be far from being out of the woods.

And weekly jobless claims numbers this morning helped underscore his downbeat assessment of the economic situation. Traders and investors were expecting another terrible figure for initial unemployment claims, with a Briefing.com consensus estimate forecasting an addition of 2.475 million initial claims. The actual number came in worse than expected, showing an addition of 2.981 million initial claims.

Despite the worse-than-expected number, which reflects some of the economic pain of the pandemic and continues adding to the unemployment roster, the number of new claims added each week is continuing its trend of declining.

The Jerome Powell Show

Comments from Powell set the tone for the trading day on Wednesday, and the tone was negative.

Investors were listening for any clues about the state of the U.S. economy and future monetary policy moves. And the market seemed particularly focused on this nugget from Powell: “While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.”

The words “highly uncertain” didn’t sit well with investors, nor did “downside risks”. 

While Powell didn’t detail any new support for the economy and market from the central bank, and said the Fed isn’t considering negative interest rates, he did seem to leave the door open for additional policy measures from the Fed while also saying more fiscal support from elected officials could be costly but worth it. But it remains to be seen whether additional stimulus, if any, will come from the central bank via monetary facilities, or from Congress and the White House in the form of fiscal measures or a combination of both.

All in all, Powell’s comments left the market with a more pessimistic (or perhaps realistic) outlook on the economic recovery, without providing new, concrete responses from the central bank. This comes against a backdrop of increasing worries about the economic reopening possibly being premature, as fresh infections are being reported in locations that have eased lockdowns.

Wednesday’s Markets

The somber tone helped push the Cboe Volatility Index (VIX) above 35, and all three of the main U.S. indices slid markedly. Treasury yields also dipped, another sign that concerns about the health of the U.S. economy remain. The weakness spilled over into the Financial sector, especially banks, which are extremely sensitive to credit risk. And with interest rates as low as they are, banks could feel some pain.

In addition to weakness in equities, crude oil prices also pulled back, leading the Energy sector to the worst performance of the day. Despite the first decline in U.S. crude inventories since January, oil prices slipped as market participants worried about the demand prospects in light of Powell’s bleak outlook. 

The longer the economic downturn lasts, the longer it will be before we see robust demand for petroleum products for travel by automobile, transportation by semi-truck or train, and flying for vacation or work.

Much of the recovery for airlines depends on “the middle seat test.” Travel won’t get back to normal until people start feeling comfortable enough to take a seat between two other people on a crowded airplane. A similar assessment could probably be made for much of the rest of the economy.

Looking for a bright spot? Communications equipment giant Cisco Systems (CSCO) topped consensus on both the top and bottom lines after the close Wednesday. But like many things these days, though it's a mark in the "W" column, it comes with an asterisk—in the form of lowered expectations. Despite beating consensus, sales were still off 8% from a year ago, and its next-quarter guidance is calling for a revenue slide of between 8.5% and 11.5% vs. a year ago. And though shares rose 1.5% on the news, it came on a day when shares followed the market down—to the tune of about 3% ahead of the report.

Still, perhaps the telling lesson here is that since CSCO earnings include April numbers—when the pandemic really began to hit businesses hard—perhaps when the next earnings season rolls around, other tech companies might see numbers that aren’t as bad as some had feared.       

CHART OF THE DAY: HANGING ON TO SUPPORT. In a look at the technical picture for the S&P 500 Index (SPX), the index has been ranging between its 50% and 61.8% Fibonacci retracement levels. On Tuesday, we saw the SPX sell off from its 61.8% retracement level, and that sell off continued into Wednesday. The index reached its 50% level but bounced off it. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Negative, or a Positive?Anyone hoping that Powell might at least crack the door to negative interest rates was disappointed on Wednesday, as the Fed chief said the central bank isn’t looking at the unorthodox policy measure right now. Economic data out Wednesday didn’t seem to offer enough incentive for policy makers to change their mind. The April producer price index, a measure of inflation, fell more than expected, dropping 1.3% when a Briefing.com consensus had expected a 0.5% drop. “The Producer Price Index for April may not be convincing enough to the Fed to go down the negative interest rate road, yet the key takeaway is that it will certainly keep it on the path at the lower bound,” Briefing.com said. Although negative rates could be a boon for borrowers, overall they probably wouldn’t be good for the market. Such a move would put banks in dire straits. And the Financials sector is one of the largest in the SPX.

Negative Rates? “Negative,” Says Powell: Last week we pointed out that, despite Powell’s saying in a recent press conference that negative interest rates would not be “an appropriate policy response,” several CME Fed Funds futures contracts had been trading above 100, indicating a slightly negative interest rate. The Fed chairman has doubled down on the “not here” response, saying yesterday that “it’s not something we’re considering,” and the even more emphatic “the evidence of their effectiveness is very mixed.” 

So that’s that, right? Well, two interesting things from current CME data. First, from the April 2021 contract through the end of next year, Fed Funds futures contracts all settled above 100 Wednesday. However, if you look at CME’s FedWatch tool, the meter has moved ever so slightly in favor of a rate hike this year. Granted, it moved from a 0% chance to 0.7% chance, but still greater than zero. Rather than split hairs, it might be best to say that rates are expected to be near zero (give or take) for an extended period. 

Retail Sales Numbers On Tap: Powell’s remarks probably won’t be the last bit of sobering economic news this week. April retail sales figures are coming up on Friday, and they’re not expected to be pretty. Retail sales for the month are expected to have slid by a record 11.9%, according to a Briefing.com consensus. That’s after falling 8.7% the previous month. March’s decline was the worst on record and even worse than the average Wall Street estimate. Grocery stores were seeing plenty of demand for staple items. Not so much discretionary purchases like clothing and furniture. And restaurants and bars have been among the hardest hit. Investors might want to watch for reactions in shares of retailers like L Brands (LB), Kohl’s (KSS) and Macy’s (M) and restaurant chains McDonald’s (MCD), Yum Brands (YUM) and Darden Restaurants (DRI). Still, the market is expecting the number to be bad, so much of this might already be baked into the cake.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Government figures show 2.981 million initial jobless claims in the latest week

  • Powell says economic recovery is “highly uncertain and subject to significant downside risks”

  • Cisco Systems beats estimates on both top and bottom lines

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