Initial claims for unemployment totaled 3.17 million for the week ended May 2, the Labor Department reported. This week's total was down from the 3.85 million initial claims filed in the prior week but still brought the seven-week total to 33.5 million new claims.
Bad news on new claims for unemployment includes reports that the jobless benefits funds in some states are running near empty. California and Tennessee, for example, says their funds are close to running out. Four million people have applied for unemployment in California. A million people have applied in North Carolina.
The Fed funds futures market, which trades bets on where the Federal Reserve's benchmark interest rates are headed, has rallied this week to send prices for futures contracts in early 2021 above 100. Above 100 traders are pricing in negative interest rates from the Fed.
The Federal Reserve has currently set a benchmark rate between 0% and 0.25% and Federal Reserve Chair Jerome Powell has consistently said he's opposed to negative interest rates. But traders increasingly don't believe those protestations and see pressure from the coronavirus recession and the threat of deflation pushing the Fed below 0%.
The trend in the Fed funds futures market is supported by trends in Eurodollar options, commonly used as a hedge against Fed moves, which is offering prices based on a Fed Funds rate as low as a negative 0.45 percentage points by the middle of 2021.
This is where Powell's talk of the Fed using infinite resources to combat the coronavirus recession is turning back to bite the U.S. central bank. Powell's aggressive stance reassured debt markets that were in danger of seizing up, but it has led to traders believing that Powell will do anything necessary–including going negative–to fight the recession and a crisis in the debt markets.
The more people who discuss the possibility that the Fed could go negative, the more the futures market will price in that possibility, and the greater the possibility that the Fed will go from considering the move to actually executing it. DoubleLine Capital's Jeffrey Gundlach warned that pressure will build for fed funds to go negative. Harvard University economist Kenneth Rogoff also said this week that the Fed should drop interest rates to less than zero.
Wall Street continued its pattern for the last two months or so of looking past current bad news on the economy and remaining focused on projected future good news from the re-opening of the U.S. economy.
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