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.