By Peter Nurse
Investing.com — The Federal Reserve was pretty downbeat in its assessment of the U.S. economy, and this may increase fears of deflation going forward. The stock market is set to weaken as a result, while crude also heads lower amid fears of a supply glut. All this while concerns are growing about a second wave of the Covid-19 virus. At least initial jobless claims are likely to show an improvement in the employment market, admittedly from a low base. Here’s what you need to know in financial markets on Thursday, June 11th.
1. Fed offers up gloomy outlook; Deflation now a worry?
The Federal Open Market Committee kept rates unchanged Wednesday, with the fed funds range at 0-0.25%, and reiterated its commitment to maintaining easy monetary policy measures for some time.
“The committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” the Fed said.
This looks like being a long time – just two out of 17 FOMC members expect to see a rate rise before the end of 2022.
The Fed stated that the economy is expected to contract by 6.5% in 2020, and the unemployment rate for the year is expected to come in at 9.3%.
However, it’s the pace of inflation which is likely to be the key driver for future monetary policy, and this was forecast to cool to a rate of 0.8%, down from 1.9% previously.
In the press conference, Fed chief Jerome Powell “mentioned a weak inflation pressure, however, he did not sound overly concerned,” said analysts at Nordea, in a research note. “We, on the other hand, see deflation risks as high and have been flagging it for a while.”
This followed the core Consumer Price Index turning negative Wednesday. It also declined for the third consecutive month, which has never happened before.
The Producer Price Index for May is due at 8:30 AM ET (12:30 GMT), and will no doubt be watched closely. It measures the change in the price of goods sold by manufacturers and is a leading indicator of consumer price inflation.
Analysts estimate the PPI will rise 0.1% for the month of May, a reversal of the 1.3% decline the previous month.
2. Fears of a second coronavirus wave across the U.S.
Fears are starting to grow that the prompt reopening of many states across the U.S. will result in a second wave of infections from the Covid-19 virus, likely causing even more economic damage to a country already in an exceedingly deep recession with millions unemployed.
A few days ago top World Health Organisation official Dr. Hans Kluge warned that the pandemic was not over, and now was the “time for preparation, not celebration.”
With this mind, Bloomberg reported that Texas had registered 2,504 new coronavirus cases on Wednesday, the highest one-day total since the pandemic emerged. Florida also noted 8,553 new cases this week, the most of any seven-day period, while California’s hospitalizations are at their highest since May 13 and have risen in nine of the past 10 days.
“There is a new wave coming in parts of the country,” said Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security. “It’s small and it’s distant so far, but it’s coming.”
The Organization for Economic Cooperation and Development warned only Wednesday that global growth will contract by 7.6% in 2020 if there is a second wave of Covid-19 infections, a bigger hit than the drop of 6% it predicted without a new wave.
3. Weekly jobless claims due
The go-to data to measure the state of the U.S. employment market will be released at 8:30 AM ET (12:30 GMT), and initial jobless claims are estimated to be 1.55 million for the week, down from 1.87 million the prior week, as the overall trend on jobs continues to improve with the reopening of businesses.
Unemployment is still above 13%, according to the government’s most recent report, the highest since the post-World War II era. Continuing jobless claims are estimated to come in near 20 million, down from 21.5 million the previous week.
The reopening of the U.S. economy is clearly having a positive effect, but there is a very long way to go. Without an acceleration of hiring it would take another seven months to fully replace the April payroll at the May hiring rate.
4. Stocks set to open lower; Tech in focus
U.S. stock markets are set to open sharply lower following the downbeat comments from the Federal Reserve Wednesday, with not even the dominant tech sector able to prevent a sharp sea of red.
The Dow Jones Industrial Average and S&P 500 had ended a choppy session lower on Wednesday, but the Nasdaq Composite closed above the 10,000 level for the first time, underscoring the rebound in technology-related stocks following the coronavirus rout.
At the forefront of this strength has been Apple (NASDAQ:AAPL), with the tech giant this week becoming the first US company to achieve a $1.5 trillion market capitalization.
The tech sector will remain in focus Thursday, as graphics software maker Adobe (NASDAQ:ADBE) reports earnings. Wall Street is awaiting Adobe’s comments on how the Covid-19 pandemic and related business shutdowns affected its cloud computing business, something management warned about in their prior quarter earnings.
5. Crude inventories point to supply glut
Crude oil prices continued to push lower Thursday, as an increase in American crude stockpiles late Wednesday to a record high raised fresh concerns about a potential supply glut, just as the Federal Reserve was cautioning about longer-lasting damage on the economy from the coronavirus.
U.S. commercial crude oil inventories grew by 5.72 million barrels last week, according to the Energy Information Administration. This was very different from the small stock drawdown the market was expecting, but backed up the previous day’s report from the American Petroleum Institute.
“This increase now sees total U.S. commercial crude oil inventories stand at 538 million barrels, surpassing the levels seen back in early 2017, and in fact the highest level going as far back as 1982,” analysts at ING wrote, in a research note.
Global production cuts and the easing of lockdowns in some countries had pushed prices higher after the historic drop below zero in April. But, there are concerns U.S. producers may pump more with crude above $30 a barrel, adding to a glut.