U.S. stocks didn’t quite welcome the best jobless claims figure since job destruction began in late 2008, as the major indices spent most of the session in negative territory. The broad market did manage a slight rally in the final minutes of trading that pushed the S&P 500 to positive territory, but the day was essentially a wash.
So why the lack of euphoria? Maybe it’s because the jobless claims news reminds traders that the Fed must eventually unwind its unprecedented level of monetary easing (although fat chance of that happening anytime soon); maybe it’s because traders believed the decline had more to do with the weather (if government employees don’t report to work they can’t file the claims); maybe it was yet another corporate announcement that higher commodity prices are eating into margins – this latest coming from PepsiCo.
Energy, telecom and industrial shares led the broad market to its slight gain. Technology, consumer staples and financials were the day’s losers.
Treasury yields began the day lower (those prices rose as stock-index futures were meaningfully negative in pre-market trading), but reversed to end the session higher and pretty much match very recent highs. There are a lot of people talking about interest rates moving higher in a secular manner. I’m not really buying it as this economy has become conditioned to ultra-low rates and many challenges remain. And first rates have to break their April 2010 levels (the 10-year Treasury yield remains 33 basis points below that mark). Then, even if yields do break out the economy – which means the housing market, household and government debt servicing and the stock market – would have to be able to withstand those higher rates. I think that’s highly unlikely, which means any spike in rates will prove transitory. In addition, we’re seeing that geopolitical risks remain heightened, which makes a durable increase in rates even more doubtful. And speaking of geopolitics, that address by Muburak yesterday was super strange – and he doesn’t do himself any good by looking like Nosferatu.
But back to the topic, at some point rates will normalize but I can’t see how that occurs in the near future.
Yesterday Kevin Warsh announced he’d resign from the Federal Reserve Board of Governors effective March 31. In my opinion, Warsh was one of the more responsible members of the FOMC (the governors have permanent status on the policymaking committee). While he hadn’t actually dissented to QE measures, he’s written a couple of Op/Eds explaining that such “non-traditional” tools carry huge risks and that when the Fed must unwind, they’ll have to do so with “greater force” than in the past. Therefore he was viewed as one of the future dissenters to current policy.
Of course, we can’t know the true reason behind the resignation, but based upon past statements one expects he would rather not be around for the other side of this policy stance. He’ll undoubtedly be followed by the addition of yet another dove (an advocate of keeping policy loose), which will carry meaningful consequences -- history has shown financial turmoil follows long periods of reckless monetary policy. Pimco’s Tony Crescenzi recently commented that we may see a mutiny within the FOMC, meaning we’ll soon have three dissenters to current policy. Well, that mutiny has now become much less likely as the potential opposing force has now been reduced to just two (Fischer and Plosser).
Brent Vondera, Senior Analyst
St. Louis, MO