As expected, the Federal Open
Market Committee (FOMC) kept monetary policy unchanged this week
with the fed funds target rate in the range of 0%-0.25%. The FOMC
expects to keep that range unchanged until they are confident the
economy has weathered the pandemic and is back on track to
achieving their dual mandate of maximum employment and price
stability. The Fed pledged to use “its full range of tools to
support the U.S. economy in this challenging time.” The Fed
continues to purchase Treasury and agency mortgage-backed
securities as needed to support smooth market functioning. The
have also announced a range of lending programs in the last few
months to help build confidence in the financial markets and
support the flow of credit to households, businesses, and
municipalities. The Fed indicated the pandemic will weigh heavily
on the economy in the near-term and poses considerable risks to
the outlook over the next year or so. Fed Chair Powell cautioned
that second quarter economic data will be the worst we have seen.
He also indicated that additional fiscal support from the
government may be needed to achieve a robust economic recovery.
First quarter US gross domestic
product (GDP) declined 4.8%. The decline was within the range of
estimates but below the consensus forecast of -4.0%. The decline
in consumer spending was much worse than expected, down 7.6%
versus expectations of down 3.6%. Notably, the decline in second
quarter GDP is expected to be much more severe. The Bloomberg
median estimate for second quarter GDP is -27.3%, and consumer
spending is expected to decline 22.0%.
Another 3.8 million people filed
an initial claim for unemployment in the April 25 week, bringing
the total number of initial jobless claims since mid-March to
30.3 million out of a total labor force of 162.9 million. The
Bloomberg consensus estimate of the unemployment rate for April
is 16.0%. The April employment report will be released next
Friday.
Consumer confidence declined
precipitously in April, as anticipated, with the Consumer
Confidence index dropping nearly 32 points to 85.9. However, 40%
of the survey sample expect business conditions to improve in the
next six months. Roughly 41% expect more jobs to become
available, up from 16.9% in March. Meanwhile, a growing number of
those surveyed expect their incomes to decline.
The housing sector, which was
gaining momentum and showing strength heading into the pandemic,
has started to soften. Lending standards have tightened, and
labor market weakness and social distancing restrictions are
having a negative impact on the housing sector. However, the low
rate environment continues to fuel refinancing activity. Pricing
remained firm in February according to the Case-Shiller house
price index which was up 3.5% year-over-year. We believe low
inventory may keep pricing relatively stable over the near-term.
New home sales declined 15.4% in March, while existing home sales
declined 8.5%. The National Association of Realtors (NAR) pending
home sales index plunged 20.8% in March, much worse than
expected, pointing to potentially steep declines in the volume of
existing home sales for April. However, the NAR believes the
decline in housing market activity will be temporary and there
will be pent-up demand when the economy reopens.
Several companies reported first
quarter earnings this week. So far, just over half of the
companies in the S&P 500 index have reported first quarter
results and about 70% have beaten expectations. Earnings from the
Financials sector in aggregate have been somewhat disappointing,
while the magnitude of upside surprise has been the greatest in
the Energy sector. In aggregate, earnings growth was down nearly
9% year-over-year in the first quarter among those companies that
have reported so far, with Financials, Materials, Consumer
Discretionary, and Industrials declining the most. Many companies
have withdrawn their full year earnings guidance, and several
have suspended share buybacks in order to preserve capital. Many
companies said business trends were strong until the last few
weeks of the first quarter, and most expect second quarter
results to be much weaker. Notably, many companies said business
has stabilized or improved modestly in April from the end of
March. Some companies anticipate that conditions will begin to
recover meaningfully in the third quarter as the social
distancing restrictions are eased, while other companies believe
the recovery may take years.