U.S. stock benchmarks closed in positive territory Thursday, finishing off their best levels with energy and financials powering the day’s moves. A rally in the technology-related Nasdaq helped to drive the index undoing its coronavirus-induced selloff of the past two months.
Although there was another turbulent finish for major benchmarks in the final hour of action, stocks managed to book solid gains. Bullish investors bet on a stabilization in oil-and-gas stocks—even though oil relinquished a sharp rally to end lower. And financials punched higher amid a widening of the spread between the short-dated 2-year and the 10-year Treasury notes, a condition that is favorable to a bank’s business model.
Markets appeared to mostly shake off another 3.2 million Americans losing their jobs at the end of April, according to Labor Department data earlier in the session, bringing the total job losses amid the COVID-19 pandemic to over 33 million, though investors were relieved that the pace of job losses is slowing.
That report came a day after payroll processor Automatic Data Processing Inc. reported a 20.2 million decline in employment in April among the nation’s privately run companies.
“Usually equity markets bottom five to seven months before economic growth troughs,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. She said it was unlikely that we would retest lows for the equity benchmarks put in on March 23.
However, she said pullbacks weren’t out of the question.
“The only thing is that the market has run pretty far pretty fast, most likely on the speed and magnitude of fiscal and monetary stimulus,” she said. “That means it’s possible to get short term corrections.”
Overall, Verdence maintains a positive outlook over the 12-18 month term. That means any corrections should be seen as buying opportunities, she advised.
Negative Rates from the Federal Reserve?
Despite pushback from the Federal Reserve, some traders are now pricing in expectations that policy makers will push rates below zero.
Based on trading in fed fund futures, market participants see a one-in-three chance of rates turning negative next year amid worries that the Fed has all but expended its tools to cushion the economy and keep financial markets functioning.
Yet senior Fed officials have argued that negative rates were not appropriate for the U.S., even if they were seen elsewhere in countries like Japan and in the eurozone.
“I haven’t seen anything personally that makes me think they are worth a try here,” said Richmond Fed President Thomas Barkin, in an interview with CNBC on Thursday.
And Philadelphia Fed President Patrick Harker said subzero rates won’t help businesses struggling with the coronavirus crisis, as their issues had little to do with the cost of borrowing. He made those remarks in a webcast for the Chicago Council on Global Affairs.
Meanwhile, the 2-year Treasury note yield, sensitive to expectations for interest-rate policy, hit an all-time closing low of 0.129%. Yields fall as prices for Treasury notes and bonds rise.
Longer-term rates also declined, with the 10-year Treasury note yield fell 7.9 basis points to 0.63%.
It’s not clear, however, how many traders genuinely see negative rates in the cards. And analysts warned against reading too deeply into trading in the illiquid fed fund futures market.
Jon Hill of BMO Capital Markets noted futures contracts beyond August 2021 didn’t change hands frequently. Odds based on those contracts could therefore be swayed by moves of just a few traders.
“As soon as rate strategists saw fed funds suggest [that] negative rates are conceivable next year, they said, ‘that’s not going to happen.’ In a thin market, as soon as someone utters that phrase, you can almost be certain at least a handful of investors will quickly trade in the opposite direction,” said Jim Vogel, an interest-rate strategist at FHN Financial.
The U.S. Economy May Already Have Clawed Back 5 Million Jobs
Traders are turning far and wide for more current data on the economy than what the government provides as they assess how deep the recession is and at what degree and speed it will recover.
Scheduling software company Homebase has been providing data on employment and hours worked on a daily basis during the crisis, which is a particularly useful real-time economic indicator because its customers are in the restaurant, food and beverage, retail and services businesses, where the job losses are centered.
Based on data from Homebase, the bad news is that employment on May 5 was down 51% from pre-shutdown levels. But the good news is that this is far from the worst day, April 12, when employment was down 74%.
Homebase’s measurement of employment, hours worked and open companies comes from over 60,000 businesses.
“In other words, the decline versus the pre-COVID-19 level is becoming less deep as some jobs start to come back — albeit modestly as the reopening is only recently under way,” says Tom Porcelli, chief U.S. economist at RBC Capital Markets and a big user of the data.
Porcelli says his own estimate is that the U.S. economy has probably clawed back about 5 million jobs so far. The April jobs report, due on Friday, is expected to show 22 million non-farm positions lost, according to a MarketWatch-compiled economist estimate.