Economic recovery from the pandemic remains the main focus of investors for obvious reasons. However, simmering US-China relations moves up to second place, where it is likely to remain. Fed policy accommodation falls to third while EU Stimulus and possible Fiscal Union enters for the first time, followed by the US Fiscal Response negotiations.
Summary and Price Action Rundown
Global risk assets are rallying this morning despite heightened US-China tensions, as economic reopening and headlines regarding vaccine trials boost market spirits. S&P 500 futures point to a 1.9% higher open, which would extend last week’s solid 3.2% gain that was spurred by rising optimism over economic reopening and redoubled pledges of additional extraordinary monetary support from Fed Chair Powell. Year-to-date downside for the index is at 8.5% and the decline from February’s record high is 12.7%. Equities in the EU are moderately higher while Asian stocks jumped overnight as Hong Kong shares staged a recovery (more below). Longer-dated Treasury yields are edging higher, with the 10-year yield at 0.69%, while the dollar is depreciating as safe-haven demand wanes in today’s upbeat trading. Crude oil is resuming its recovery uptrend, with Brent back above $36 per barrel.
Hopes Over Economic Reopening and Vaccine Progress Spur Further Equity Upside
Last week’s solid US equity market rebound is set to continue today, underpinned by optimism over easing lockdowns, recovering economic activity, and more encouraging news of progress toward a vaccine. Over the weekend, biotech company Novavax announced an expansion of their vaccine trials into the first human studies. Meanwhile, Moderna released more data regarding their ongoing antibody trials. For context, White House virus expert Dr. Fauci in an interview on Friday opined that the data from biotech company Moderna on their vaccine trials “is really quite promising” and that it is a reasonable to expect, barring unforeseen setbacks, a vaccine to be ready for deployment by December 2020 or January 2021. For context, US equities were whipsawed last week as Moderna’s upbeat disclosures about their progress toward a vaccine propelled stocks higher on Monday but reports that the data was insufficient to draw any supportable conclusions set stocks back on Tuesday. And headlines this morning indicate that Merck is also engaging in efforts toward developing a vaccine. Meanwhile, reports over the weekend focused on reopening beaches and large crowds as lockdown restrictions ease unevenly nationwide.
US-China Tensions Percolate as Hong Kong Protests Resume
Relations between Washington and Beijing have continued to deteriorate over recent weeks, with Congress pushing legislation to counter China on a variety of fronts, President Trump turning up the rhetorical heat, Chinese media threatening retaliation, and pressure rising in Hong Kong. However, concerns have been tempered by reports that the protests in Hong Kong featured relatively smaller crowds than prior rounds of demonstrations and draw a standard police response. Meanwhile, Chinese officials are downplaying the impact of the law on the territory, pledging that judicial independence will continue. Hong Kong’s benchmark Hang Seng equity index steadied yesterday and gained 1.9% today. For context, the Hang Seng plunged 5.6% last Friday following the news that China will impose a stricter security regime on the territory, overriding the local legislature. Over the weekend, White House National Security Adviser O’Brien suggested that Beijing’s move falls afoul of the Hong Kong Human Rights and Democracy Act, which was signed into law last year and requires the State Department to certify that Hong Kong is sufficiently autonomous from China for the city to qualify for favorable trading terms with the US. Two Senators have introduced an even more aggressive bill to sanction Chinese entities and individuals that take part in enforcing the new security law in Hong Kong and punish banks that do business with them. Lastly, the Commerce Department placed an additional 33 Chinese entities on their trade blacklist over the weekend, drawing a stern response but no overt retaliation from China, though Chinese state media has indicated that Beijing could reciprocate by placing US firms on Beijing’s “unreliable entities” list.
Additional Themes
Boston Fed Signals Impending Start of Main Street Lending Program – In a television appearance on Sunday, Boston Fed President Rosengren indicated that the Fed’s Main Street Lending Program (MSLP) will begin buying loans within the next two weeks. The $600 billion program is designed to provide access to credit for small and medium-sized businesses, with the Fed expanding the eligibility criteria a late last month to include those with up to 15k employees and $5 billion in annual revenue. Some analysts have opined that the revisions to the program are designed to include more energy companies, which traditionally carry significant debt and are currently facing a low oil price environment. Unlike Congress’ Paycheck Protection Program, MSLP loans are not meant to be forgiven and do not have any hard requirement to spend the money maintaining headcount.
Economic Data Hints at Rebound – German exporter confidence for June missed expectations but rose from -23.1 the prior month to -18.9. Later today, the Conference Board will publish its US consumer confidence index for May, which is also expected to show improvement.
Summary and Price Action Rundown
Global risk assets are trading with a cautious tone this morning amid heightened US-China tensions, with Hong Kong in the spotlight as China prepares to clamp down on the territory. S&P 500 futures indicate a 0.2% lower open, which would further pare this week’s solid 3.0% gain, spurred by rising optimism over economic reopening and redoubled pledges of additional extraordinary monetary support from Fed Chair Powell. Year-to-date downside for the index is at 8.7% and the decline from February’s record high is 12.9%. Equities in the EU are also moderately lower while Asian stocks underperformed overnight as Hong Kong shares plunged (more below). Longer-dated Treasury yields are edging lower, with the 10-year yield at 0.65%, while the dollar is rising as growth concerns weigh on a number of peer currencies. Crude oil is reversing a portion of its sharp uptrend from recent lows, with Brent back below $35.
US-China Tensions Intensify Further Over Hong Kong
Relations between Washington and Beijing have deteriorated sharply this week, with Congress pushing legislation to counter China on a variety of fronts, President Trump turning up the rhetorical heat, Chinese media threatening retaliation, and pressure rising in Hong Kong. The benchmark stock index for Hong Kong plunged 5.6% overnight, falling to its lowest level since early April on the news that China will impose a stricter security regime on the territory, with the decision being finalized at this week’s National People’s Congress in Beijing. Democracy activists in the city are planning to resume street protests this weekend. President Trump made oblique comments on the impending crackdown, saying “if it happens, we’ll address that issue very strongly.” Meanwhile, two Senators introduced a bill to sanction Chinese entities and individuals that take part in enforcing the new security law in Hong Kong and punish banks that do business with them. For context, the Hong Kong Human Rights and Democracy Act, which was signed into law last year, requires the State Department to certify that Hong Kong is sufficiently autonomous from China for the city to qualify for favorable trading terms with the US. Tensions had already been rising after the US Senate passed a bill earlier this week with broad bipartisan support which could result in the eventual delisting of Chinese companies currently trading on US stock exchanges unless they pledge that they are not controlled by Beijing and submit an audit for inspection by the Public Company Accounting Oversight Board within three years. Speaker Pelosi said she would study the bill and analysts suspect that it will pass the House over the coming weeks and be signed by President Trump. Shares of US-listed Chinese tech giants sold off again yesterday despite the relatively lengthy timeline for any enforcement actions (three years at least). A report indicated that search engine giant Baidu is considering leaving the Nasdaq in favor of an Asian bourse listing.
Dollar Rises as Peer Currencies Sink on Growth Fears
After spiking higher amid the onset of the Covid-19 pandemic in March, the dollar has remained remarkably stable over the past two months, but analysts remain concerned that another leg higher could add to global deflationary pressures. Though the dollar remains in the middle of its two-month trading range against a broad basket of global currencies and a gauge of currency volatility has eased to its lowest level since early March, today’s appreciation demonstrates how weakness among its peers can lift the greenback. The renminbi declined 0.3% overnight versus the dollar, as traders cited the decision by China’s government to scrap its GDP target in light of great uncertainty due to the coronavirus. The renminbi is now at its weakest level versus the dollar since last October, during the height of US-China trade tensions. Meanwhile, the Australian dollar lost 0.5% overnight against its US counterpart as rating agency Fitch cut the country’s credit rating outlook from stable to negative, although it remains at the top tier AAA for now. Lastly, the UK pound is down 0.3% versus the dollar after April retail sales cratered 18.4% year-on-year, with futures markets continuing suggest that the Bank of England cuts interest rates into negative territory over the next year.
Additional Themes
Oil Prices Retreat Amid China Growth Concerns – Brent crude prices are retreating this morning from their highest level since early March as traders cite the Chinese government’s unexpected move to scrap its growth target, which late last year had been set at around 6%, down from 6-6.5% in 2019. The ongoing pickup in Chinese oil demand has been considered an important catalyst for the rally and an encouraging harbinger for a broader recovery in global energy usage as lockdowns ease in the US and EU, though analysts caution that high prices could also lift supply.
Looking Ahead – Next week, the holiday-shortened US calendar still features a number of major economic releases, featuring first quarter GDP and an array of April data, including new home sales, personal income and spending, durable goods orders, and PCE prices (the Fed’s preferred gauge of inflation pressure). For all our US readers, we hope you enjoy a pleasant Memorial Day weekend
Summary and Price Action Rundown
Global risk assets are pausing their ongoing rally this morning amid heightened US-China tensions while investors await more dismal US economic data and Federal Reserve communications. S&P 500 futures point to a 0.5% lower open, which would pare this week’s solid 3.8%, spurred by rising optimism over economic reopening and redoubled pledges of additional extraordinary monetary support from Fed Chair Powell. Year-to-date downside for the index has narrowed to only 8.0% and the decline from February’s record high is at 12.2%. Equities in the EU and Asia also posted moderate losses overnight. Longer-dated Treasury yields are steady, with the 10-year yield at 0.67%, while the dollar is flat in the middle of its recent trading range. Crude oil is extending its sharp uptrend from its lows, with Brent topping $36.
Investors Ponder the Ramifications of US-China Tensions
The US and China continue to trade barbs over a broad array of issues, with the Senate passing a bill targeting Chinese stocks that trade on US exchanges and President Trump turning up the rhetorical heat. Yesterday, the US Senate passed a bill with broad bipartisan support which could result in the eventual delisting of Chinese companies currently trading on US stock exchanges barring fulfillment of certain conditions. Specifically, the bill calls for listed companies to pledge that they are not controlled by a foreign power or government, and notwithstanding the generalized language, the sponsors of the bill made clear that it is specifically directed at Chinese companies. Also, if a company does not submit an audit for inspection by the Public Company Accounting Oversight Board for three straight years, its shares will be delisted from US exchanges. Though the House of Representatives is not yet taking up this legislation, analysts suspect that it will over the coming weeks and believe it will pass and be signed by President Trump. Shares of US-listed Chinese tech giants sold off on the headlines but mostly recouped their intraday losses, likely due to the relatively lengthy timeline for any enforcement actions (three years at least). A basket of Chinese ADRs fell as much as 3.9% from the intraday highs but closed only 0.6% lower on the day. Relatedly, shares of Luckin Coffee extended their precipitous plunge after reopening yesterday for trading on the Nasdaq following a suspension due to the revelation in April that management fabricated an enormous amount reported sales. The Nasdaq is set to delist Luckin Coffee pending a hearing and has indicated that it will tighten the accounting requirements for its listed companies. Separately, President Trump took to Twitter last evening to suggest that Chinese President Xi has a hand in the disinformation campaigns over the pandemic and that China is “desperate” for Biden to beat him in November’s presidential election. Early yesterday, tension had already been rising between China and the US, as Chinese officials reacted sharply to Secretary of State Pompeo’s recent statements on Taiwan, which Beijing are calling a violation of the “one-China” principle.
Fed Minutes Convey Caution as Investors Await Weekly Jobless Data
The minutes of the April 28-29 FOMC meeting released yesterday demonstrated continuity of the Fed’s historically accommodative posture in face of the Covid-19 pandemic as economic data remains severely depressed. Citing the extraordinary amount of uncertainty and considerable risk to the economy in the medium term, members noted that interest rates will be kept near zero until a recovery is firmly in place and reiterated their commitment to use their full range of tools to support the US economy. The outlook was generally dour, focusing on the risk that a second wave of the pandemic could lead to another round of lockdowns and drag the US economy deeper in recession, prompting a further jump in unemployment and renewed downward pressure on inflation. Fed Chair Powell will make more remarks today, as will Vice Chair Clarida and New York Fed President Williams. Meanwhile, today’s tally of jobless claims for the week ending May 16th are estimated at 2.4 million, which remains dismally high but would continue the declining trend over recent weeks and mark the lowest level since the pandemic began. For context, 3.0 million Americans filled for unemployment benefits for the week ending May 9th, down from 3.2 million the prior week, lifting the total reported to 36.5 million, equivalent to nearly a quarter of the working age population.
Additional Themes
Treasury Issues 20-Year Bond – Yesterday, traders noted a strong Treasury auction for its new 20-year bonds, which is the first time the maturity has been sold since 1986. Both the 10-year and 30-year bonds rallied following the sale of their new benchmark neighbor. In his testimony yesterday, Treasury Secretary Mnuchin indicated that he had turned down proposals of 50- & 100-year Treasury issuances because “demand is just not there.”
Turkey Cuts Rates – The lira has recovered modest losses today against the dollar after the central bank cut its policy rate for the ninth straight time from 8.75% to 8.25%. The lira has rallied in recent weeks after registering a record low against the dollar early this month.
Summary and Price Action Rundown
Global risk assets are uneven this morning investors grapple with uncertainty over the outlook for Covid-19 treatments and economic reopening while awaiting Fed meeting minutes from April. S&P 500 futures indicate a 1.1% higher open, which would retrace yesterday’s late session swoon for the index that followed publication of an article casting doubt on early progress toward a coronavirus vaccine. That setback put year-to-date downside at 9.5% and the decline from February’s record high at 13.7%. Equities in the EU are moderately higher while Asian stocks were mixed overnight. Longer-dated Treasury yields are steady below their recent peak, with the 10-year yield at 0.69%, while the dollar is continuing to edge back to the middle of its recent trading range. Crude oil is resuming its uptrend, with Brent topping $35.
Spotlight Remains on Fed Accommodation Ahead of Meeting Minutes
With Fed Chair Powell’s testimony in front of the Senate Banking Committee yesterday reemphasizing for the second time this week his intention to ease monetary policy further as needed, market participants will parse the minutes from April’s FOMC meeting for any further clues as to the outlook. The minutes are expected to again convey a bias toward further accommodation but also suggest that negative interest rate policy (NIRP) is not being considered. At the April Fed meeting, the FOMC voted unanimously to maintain the target range for the federal funds rate between 0 to 0.25% and held the interest on required and excess reserve balances at 0.10%. The accompanying statement reiterated that the Fed is committed “to using its full range of tools to support the economy” and “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.” Subsequent Fed communications have remained consistent with this formulation. In his post-decision press conference, Chair Powell opined that the Fed will likely have to do more to support the economy over the coming months and downplayed concerns that unprecedented monetary easing risks inflating an asset price bubble. For context, the Fed cut interest rates to near zero at two unscheduled meetings in mid-March and began purchasing massive quantities of bonds to repair financial markets, among other liquidity and economic support programs.
Questions on Vaccine Breakthrough Whipsaw Investor Sentiment
Monday’s optimism over apparent progress toward a Covid-19 vaccine by biotech company Moderna was shaken by a report pointing out the lack of data needed to accurately assess the results. Stocks faded in late trading yesterday after a Stat article highlighted the gaps in Moderna’s reporting of results, which expert sources said prevented any independent evaluation of the already narrow study. For context, the market mood turned euphoric on Monday on the announcement that Moderna’s phase 1 trial of a promising coronavirus vaccine yielded positive results and that the company is planning to begin phase 2 testing within the coming days. The results came from an interim report on dozens of patients followed over weeks, whereas standard vaccine studies require broad testing in thousands of patients followed over many months or years. With its share price having quadrupled year-to-date, Moderna is readying a stock sale to raise $1.3 billion to fund development of the vaccine, though its shares sank 10.4% yesterday and are down another 3.7% in pre-market trading.
Additional Themes
PBoC Holds Steady as US-China Tensions Percolate – Overnight, the People’s Bank of China (PBoC) held its one-year Loan Prime Rate (LPR) steady as expected after lowering it by 20 basis points (bps) to a record low of 3.85% on April 20th. That was the second cut this year as policymakers sought to shore up the economy battling with the Covid-19 outbreak after it contracted by 6.8% year-on-year in Q1 2020, the first decline since 1992. The two cuts this year have lowered rates from 4.1% to 3.85%. Over that time, the five-year LPR was also shaved by 10bps to 4.65%, more than market consensus of a 5bps reduction. Estimates project the LPR to be 3.70% by July. This comes ahead of China’s annual National People’s Congress, which begins on Friday after a pandemic-induced delay. Analysts will parse official communications from the gathering for any significant policy signals. Meanwhile, tensions with the US and its allies continue to simmer, as Chinese officials reacted sharply to Secretary of State Pompeo’s recent statements on Taiwan, which Beijing are calling a violation of the “one-China” principle.
Retailer Earnings – Yesterday, Walmart and Home Depot reported their earnings with mostly positive results, particularly with Walmart’s e-commerce sales, which soared 74%. Walmart and Home Depot shares nevertheless closed lower yesterday, falling 2.1% and 3.0%, respectively, but retain year-to-date gains of 5.1% and 9.0%. Lowe’s and Target are in the spotlight today, with a preliminary assessment showing surprising upside for the former and tepid results for the latter. For context, April retail sales sank 16.4% month-on-month and 21.6% on the year.
Looking Ahead – A Lack of Discipline
Take it from us, Wall Street is not the only place where complacency can set in during a big rally in the S&P 500. US equities can seem to policymakers like a tick-by-tick opinion poll, particularly at a time like this when the fiscal and monetary might of the government is playing such a central role in driving risk asset prices. Plus, the Trump administration has more expressly tethered their fortunes to the stock market than any other in recent memory and under that formulation, buoyant equity prices can easily be taken as a validation of whatever policy prescriptions are currently being administered.
In short, policymakers can easily read too much into a stock market rally, as equities are a fickle friend. Though the S&P 500 might appear to “like” accelerated efforts to reopen segments of the US economy, that does not mean that it would not turn on a dime and head southward again if infection rates shoot up, threatening a re-imposition of lockdowns. The staunchest defender of the efficient market hypothesis still cannot claim that stocks are a crystal ball.
Even if policymakers take price action with the appropriate grain of salt, it remains the case that rising US stocks inevitably drain some of the urgency out of the proceedings in Washington DC. Market price action, particularly high profile, headline grabbing, 401K bashing stock market declines, can be very effective at focusing the minds of Congress, the Federal Reserve, and the administration on attempting to address the problems at hand. When a warning siren is blaring on Wall Street with equities in freefall, officials scurry around trying to figure how to silence it. Now, the S&P 500 is not even down 10% year-to-date and the Nasdaq is already back in positive territory for the year, so if stocks are telling everyone the coast is clear, why do we need another $1 trillion plus stimulus package?
A former Treasury official once recounted a story – during one of the later repetitions of the tedious debt ceiling showdowns, Wall Street had completely tuned out and stocks were rallying steadily even as Tea Party rabble rousers threatened a sovereign US default. A concerned member of Congress asked why stocks were so upbeat in the face of this significant threat, and the Treasury official explained that investors had seen this movie before a few times and figured they knew how it would end. The response was “don’t investors know that the less they worry about a debt ceiling accident, the more likely it becomes?” In other words, without the market performing a disciplinary function, policymakers are more apt to misbehave.
There seems to be a similar dynamic developing with regard to the next version of a pandemic relief bill (the latest CARES Act sequel). One of the key pillars of the turnaround in market sentiment is the massive fiscal response from Congress, but the very existence of the rally makes additional follow-through on the fiscal response less likely. Without conspicuous stock market losses to hold Congress’ collective feet to the fire, the less likely anything further gets done. The partisan armistice that was achieved during the torrid weeks of March and April looks like it may not hold as the House Democrats, Senate Republicans, and Trump administration officials head back to their entrenched positions and prepare for battle over policy turf while unemployment is at Depression levels. Earlier today, National Economic Council Director Kudlow said that negotiations are officially on pause for this month.
For policymakers looking for a more accurate market-based gauge of economic expectations, we would suggest focusing on the prescient Treasury market, which is signaling deep and persistent US economic doldrums, rather than on flighty and emotional equities, which are notorious for overshooting at inopportune times.
Looking ahead to next week, market participants will attempt to look past more horrendous economic data amid an overriding focus on the prospects for recovery.
Global Economic Calendar
Monday
The week begins in Australia with the National Australia Bank’s Business Confidence Index. In March the index crashed to a record low of -66 from -4 in February. The index of business conditions plummeted to -21 from 0 the prior month, dragged down by sharp declines in sales, profits and employment. April is expected to be -70.
Tuesday
Tuesday’s focus will be on the Consumer Price Index for April. In March Headline CPI fell 0.4% m/m to 1.5% y/y. This is the lowest level since February 2019 and the largest monthly drop since January 2015, driven by a 10.2% slump in gasoline and a 1.6% drop in apparel prices. Core CPI, which excludes the more volatile food and energy components, fell 0,1% m/m putting it up 2.1% y/y but below market consensus of a 2.3% advance. March marked the first monthly drop in Core CPI’s since January 2010.
In Australia on Tuesday the focus will be on the Melbourne Institute and Westpac Bank Consumer Sentiment Index. In April the index fell 17.7% to 75.6, the biggest monthly fall in survey history, taking the index to its lowest level since February 1991. Outlook on Economic conditions for the next 12 months dropped 31% to 53.7 points, the lowest since the Financial Crisis, and conditions for the next 5 years fell 3.8% to 87. In addition, time to buy a major household item tumbled 31.6 % to the lowest on record of 76.2.
Wednesday
Wednesday brings the first estimate of First Quarter GDP in Great Britain. 4Q19 GDP was flat as household consumption was unchanged, marking the first period that it has not increased since the 4Q15, while gross fixed capital formation dropped the most in nearly two years, led by a contraction in business investment. Meanwhile, government consumption rebounded firmly, driven by education and health, and net trade contributed positively to the GDP as exports rose more than imports. On the production side, services activity grew at a softer pace, while production output fell due to declines in manufacturing, and mining and quarrying. In addition, construction output dropped into contraction territory. Expectations are for a 2% contraction in the first quarter as the UK implemented a lockdown to battle the virus.
In the US we will see Producer Price Index (PPI) for April. In March PPI fell 0.2% m/m but increased 0.7% y/y, after declining 0.6% m/m but increasing 1.3% y/y in February. March PPI was the lowest level since September 2016. Cost of goods fell 1%, mainly due to a 6.7% drop in energy costs. In contrast, prices of services increased 0.2%, mainly due to an 8.1% rise in margins for apparel, jewelry, footwear, and accessories retailing. Core PPI came in 0.2% m/m higher, after falling 0.3% in February, and above forecasts of a flat reading.
Wednesday also features the Australian Employment Report for April. In March the Australian economy added 5,900 jobs to 13,017,600, following a 25,600 gain in the previous month and easily beating market forecasts of a 40,000 fall. Australia’s seasonally adjusted unemployment rate edged up to 5.2% in March from 5.1% in February but less than market expectations of 5.5%. The number of unemployed people rose by 20,300 to 718,600. By the end of this quarter, the Employment Change in Australia is expected to be a loss of 65,000 persons and the Unemployment Rate in Australia is expected to be 9.00%.
Thursday
Thursday brings a host of data on the Chinese economy starting with Industrial Production for April. March production dropped by 1.1% y/y, after a 13.5% plunge in January-February, but far less dire than market expectations of a 7.3% fall. Output fell at a softer pace for both manufacturing and utilities, while a rebound was seen in mining.
We also will see Retail Sales for April. March sales declined 15.8% y/y in March, following a 20.5% slump in January-February, worse than market expectations of a 10% fall. Sales continued to decline for most categories, while sales rebounded for personal care, office supplies, and telecoms.
On Thursday in the US the focus will be on Initial Jobless Claims. Last week 3.169 mil Americans filled for initial unemployment benefits, compared to 3.846 mil in the prior week and above market expectations of 3.0 mil. Last week’s filings lifted the total reported since the beginning of the coronavirus crisis to 33.5 mil, equivalent to a 22% unemployment rate. The largest increases were seen in California, Texas, Georgia, and New York, while continuing jobless claims hit a new record of 22.647 mil. Tomorrow the BLS will release the April Employment Report where consensus expectations are for a loss of 22 mil jobs and a 20% unemployment rate.
Friday
Friday’s focus will be on US Retail Sales for April. March sales plunged 8.4% m/m and 5.8% y/y and was the largest monthly decline on record and the largest decline in trade since 2009. Excluding autos, retail sales fell 4.2% m/m. The biggest decreases were seen in clothing, furniture, restaurants & bars, motor vehicles & parts, sporting goods, hobby, musical instrument & books, and electronics & appliances. Receipts at gasoline stations also fell sharply as consumers cut back spending on fuel and as oil prices plunged. On the other hand, sales of food & beverages and health & personal care products rose.
We will also see Industrial Production for April. March production slumped 5.4% m/m and 5.5% y/y, the largest monthly drop since January 1946, and worse than market expectations of a 4% dive. Manufacturing output fell 6.3%, the most since February 1946. The declines were led by a 28.0% tumble in motor vehicles and parts output.
Finally, the week ends with the Michigan Consumer Expectations Index for May. In April the index fell to 71.8, the lowest reading since 2011. Surveys of Consumers chief economist, Richard Curtin stated that “In the weeks ahead, as several states reopen their economies, more information will reach consumers about how reopening could cause a resurgence in coronavirus infections. The necessity to reimpose restrictions could cause a deeper and more lasting pessimism across all consumers, even those in states that did not relax their restrictions.”
Summary and Price Action Rundown
US stocks retreated today as closely-followed testimony by Dr. Fauci emphasized the risks of a premature economic reopening. The S&P 500 accelerated to the downside into the close of trading, ultimately falling 2.1% on the day to deepen year-to-date downside to 11.2% and the decline from February’s record high to 15.2%. Equities in the EU and Asia were more upbeat but generally directionless. Longer-dated Treasury yields reversed much of their recent upside, with the 10-year yield sinking to 0.66%. The dollar gained slightly and remains within a tightening trading range. Crude oil fluctuated around three-week highs.
Investor Continue to Grapple with Uncertainty Over Economic Reopening
Today’s virtual Senate testimony by self-quarantined White House coronavirus advisor Dr. Fauci highlighted the challenges of reopening the economy. Dr. Fauci sounded a cautious note in his testimony today, warning that restarting economic activity before important containment benchmarks are achieved carries the “real risk” of widening outbreaks that reverse progress toward recovery. With investors refocusing on the risks of secondary infection spikes and re-imposed lockdowns, US equities retraced a portion of their recent rally today. Meanwhile, the marked divergence in performance among “winners” from the pandemic, like health care and IT stocks, and “losers,” like banks and industrials, was less apparent today as all sectors posted meaningful losses. Treasury markets, meanwhile, remain consistent with a lengthy economic trough, though fed fund futures have not reverted to negative territory in December and January contracts after a series of FOMC officials have downplayed the likelihood that policy rates would be cut below zero (more below). – MPP view: Our base case has been for an unfortunately long tail for this pandemic, with an uneven and challenging reopening process. We have been skeptical that extreme IT/healthcare sector outperformance can continue to drag the S&P 500 higher, but nevertheless have been impressed by the relative buoyance of US equities over recent weeks despite the apparently thin justification for optimism, the lack of upside validation from Treasury, credit, and commodities markets, and the scant likelihood of a V-shaped recovery.
Economic Pain Spurs Efforts Toward Another Pandemic Relief Bill
House Democrats are readying the latest fiscal support package for the economy as data continues to highlight the depths of the pandemic-related contraction. This afternoon, House Democrats released a draft version of the latest Covid-19 relief bill totaling $3 trillion, which is set to go to the House Rules committee on Thursday in preparation for a vote on Friday. For context, the so-called Heroes Act features $1 trillion in support for states and municipalities, money for Covid-19 testing, direct payments to households of up to $6000, and surpasses the size of its predecessor, the $2.2 trillion CARES Act, which was signed into law in March. Republicans in the House are set to oppose the relief bill while Senate Republicans are said to be split, with Majority Leader McConnell calling instead for “narrowly-targeted legislation.” The White House has sent mixed signals on this latest round, with President Trump today referencing the potential for a second round of stimulus payments to households.
These efforts come amid more depressed US economic data ahead of closely-watched April retail sales and industrial production data, which is due on Friday. Today’s release of the headline consumer price index (CPI) showed a decline of 0.8% month-on-month (m/m) in April, the most since December 2008, as gasoline prices plunged 20.6%. This leaves the CPI up a mere 0.3% year-on-year (y/y), the lowest level since 2015. While energy prices plunged last month, the cost of food at home surged 2.6% m/m, the most since 1974, as Americans stocked up at grocery stores. Prices for bread, chicken, carbonated drinks, and snacks all posted record increases, as did household paper products. Meanwhile, Core CPI, which excludes the more volatile food and fuel prices, fell 0.4% m/m, following a 0.1% decrease in March, which was the steepest decrease since 1957. This dropped the Core Index to 1.4% y/y after it rose 2.1% in March.
Meanwhile, small business confidence took another hit in April as the NFIB Small Business Optimism Index fell 5.5 points to 90.9, down from 104.5 in February. Owners expect the economy will weaken in the near-term and saw sales expectations plummet 30 points to -42. However, there is optimism that the recovery will be “V” shaped as business conditions expectations over the next six months erased the entirety of the decline seen in March. As many states are beginning the process of easing stay-at-home restrictions, both investors and business will be paying close attention to daily infection rates across the US and globe to see if this optimism is based in the reality of the virus. – MPP view: The ongoing US equity rally has (at least in part) been premised on expectations of continued stimulus, but the strength of the rally has made continued stimulus less likely. Rightly or wrongly, policymakers respond to signals from equities and we think the soaring stock market has contributed to a sense of complacency in some quarters on Capitol Hill.
Additional Themes
US-China Tensions Rising but Still Restrained – Despite last week’s improving atmospherics in the trade relationship, friction between China and the US, as well as some of its allies, has continued rising this week. President Trump ordered the federal thrift savings plan (TSP) for federal employees to halt investments in Chinese stocks, valued at $4.5 billion, yesterday. The action is in line with a hardening White House stance against China premised on charges of malfeasance in Beijing’s handling the initial outbreak. Chinese shares evidenced little reaction to the move, but Asian equity futures remained choppy amid pandemic-related concerns. President Trump’s TSP move has received bipartisan support but do not represent the extent of American investment in Chinese securities. Governor Newsom has also been subject to calls from federal legislators to divest his state’s largest public pension fund, CALPers, from its $3.1 billion of Chinese assets, but has not responded publicly. State pension funds in the United States have invested over $300 billion in Chinese assets. These funds’ divestment policies are currently at the discretion of their respective governors. Still, the federal divestment is one more component in escalating hawkishness from the administration.
Meanwhile, Australian stocks fell but and the Aussie dollar dipped after China suspended a significant portion of beef imports, a decision that may be tied to a spat over the pandemic.
More Fed Officials Talk Down NIRP – Today, St. Louis Fed President Bullard and Dallas Fed President Kaplan both downplayed the potential for the FOMC to adopt a negative interest rate policy (NIRP), sentiments echoed by Minneapolis Fed President Kashkari, although he declined to rule out the policy entirely. This comes after yesterday’s remarks from Chicago Fed President Evans and Atlanta Fed President Bostic also expressed skepticism over the appropriateness of NIRP. Correspondingly, fed fund futures have shifted out of negative territory on the late 2020/early 2021 contracts. Analysts expected Fed Chair Powell to mirror his colleagues’ skepticism on NIRP in his remarks on tomorrow. Meanwhile, the New York Fed announced yesterday that it will begin to buy corporate credit, some of it below investment grade, though exchange-traded funds (ETFs). Reports suggest an initial amount of $250 billion among the Fed’s overall purchase programs will be allocated to corporate credit ETFs.
Summary and Price Action Rundown
Global risk assets are consolidating after yesterday’s powerful rally, which was spurred by news of apparent progress toward a Covid-19 vaccine and redoubled pledges of monetary support from Fed Chair Powell. S&P 500 futures point to a 0.4% lower open, which would trim yesterday’s 3.2% surge for the index that put year-to-date downside at 8.6% and the decline from February’s record high at 12.8%. Equities in the EU are similarly retracing a portion of yesterday’s upside this morning while Asian stocks posted gains overnight. Longer-dated Treasury yields are settling lower after rising alongside equities to start the week, with the 10-year yield at 0.71%. Meanwhile, the dollar is continuing to slide back to the middle of its recent trading range. Crude oil is also pausing its recent upside run, with Brent fluctuating below $35.
Equities Pause for Breath After a Surge of Vaccine Optimism
Investors continue to digest yesterday’s tantalizing news of positive results in early vaccine trials, which bolstered hopes for a faster-than-expected economic recovery and propelled risk asset prices higher. The market mood turned euphoric yesterday on the announcement that Moderna’s phase 1 trial of a promising coronavirus vaccine yielded positive results and the company plans to begin phase 2 testing within the coming days. The trial of mRNA-1273 began in March as test subjects were given two doses of the vaccine. The phase 1 study showed that in the tested subjects, the vaccine effectively prevented the virus from replicating in the body. Dr. Tal Zaks, Moderna’s chief medical officer stated “[this] data substantiates our belief that mRNA-1273 has the potential to prevent COVID-19 disease and advance our ability to select a dose for pivotal trials.” While the data is uplifting in the race for a vaccine, this still only represents the first successful step in a long process to bring a vaccine to market. For context, these results come from an interim report on dozens of patients followed over weeks, whereas standard vaccine studies require broad testing in thousands of patients followed over many months or years. Given the elevated uncertainty and, even if this is a true breakthrough, a lengthy timeline for broad deployment, risk assets are retracing a portion of yesterday’s rally.
Powell and Mnuchin Senate Testimony in Focus
With Fed Chair Powell’s more balanced remarks over the weekend and pledges of more monetary support helping spur risk asset prices higher yesterday, investors will closely parse his remarks today, alongside those of Treasury Secretary Mnuchin, in front of the Senate Banking Committee. After stating in an interview aired over the weekend that “there’s a lot more” the Fed can do and that it is “not out of ammunition by a long shot,” Chair Powell is set to testify before the Senate Banking Committee today that he is prepared to utilize the Fed’s “full range of tools to support the economy,” according to his prepared statement. His prepared remarks also convey an expectation “to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.” Meanwhile, Secretary Mnuchin’s statement conveys an expectation for a US economic rebound in the second half of the year. Mnuchin is likely to receive many questions on the Paycheck Protection Program (PPP), one of the key planks of the CARES Act relief bill. Last week, Mnuchin indicated that “technical fixes” would be made to address the concerns of some businesses with the PPP. Specifically, the Treasury is set to adjust the condition that for the loans to be forgiven, 75% of the funds had to be spent on employee salaries and the funds used within two months. The changes are underpinned by a notable cooling demand for loans, which may reflect companies’ inability to use the funds. For context, the initial installment of $350 billion in loans ran out after about two weeks, but three weeks after the second $310 billion tranche of funding was released, about 37% of the funds remained available, according to figures on the SBA website.
Additional Themes
Historic EU Stimulus Plan Revealed – Yesterday’s announcement of the €500 billion regional economic support fund was significantly more impactful than expected, as France and Germany agreed to raise the money for the spending on an EU-wide basis, tracking the standard budgetary contribution formula, but will be disbursed to the areas of greatest need. Importantly, the distributions are proposed to be primarily in grants rather than loans, with the European Commission to be responsible for directing the outlays. This potentially historic blueprint still requires approval by the 27 member states, and a final proposal is due by the May 27th European Summit. The euro is extending its rally versus the dollar this morning. –
Retailer Earnings – Though first quarter earnings seasons is largely complete, retail giants Walmart and Target report today, alongside home improvement bellwethers Home Depot and Lowe’s. A preliminary read shows Walmart’s e-commerce strategy paying off.
Markets are rallying as scientific breakthroughs are providing optimism to the market outlook and the Fed remains willing to provide further support if needed. Moving up to 3rd is simmering US-China tensions, replacing the oil price rebound. Finally, attention remains on Capital Hill and the chances of passage of a Phase 4 spending bill.
Summary and Price Action Rundown
Global risk assets are rallying to start the week with the progression of economic reopening and higher oil prices buoying sentiment, while Fed Chair Powell offered a more balanced assessment of risks in his commentary over the weekend. S&P 500 futures indicate a 1.7% higher open, which would pare last week’s 2.3% loss for the index that put year-to-date downside at 11.4% and the decline from February’s record high at 15.4%. Equities in the EU are outperforming this morning while Asian stocks were moderately higher overnight. Longer-dated Treasury yields continue to fluctuate above recent lows, with the 10-year yield at 0.65%. Meanwhile, the dollar is edging lower within its recent trading range. Brent crude prices are vaulting higher on upbeat reports of China’s oil demand recovery (more below).
Investors Parse Additional Commentary from Fed Chair Powell
Following a set of remarks last Wednesday that were taken by analysts as cautious and somber, Chair Powell’s interview on CBS which aired over the weekend featured a somewhat more balanced assessment of the economic risks and hinted at future easing strategies. Chair Powell warned that the economic rebound could be so slow as to stretch through the end of next year and that full recovery may require a vaccine. These dour assessments, however, were tempered by his statement that the US economy could “recovery steadily” through the second half of this year in the absence of a secondary wave of infections. On the outlook for monetary policy, Chair Powell reemphasized that “there’s a lot more” the Fed can do and that it is “not out of ammunition by a long shot.” He suggested that forward guidance and adjusting asset purchases might be the next policy levers the Fed would pull, with the full transcript of the interview revealing his continued lack of enthusiasm for negative interest rate policy (NIRP). Also, Chair Powell again hinted an endorsement of additional fiscal support for the economy. This comes after his remarks last Wednesday were characterized by analysts as broadly downbeat, calling the pandemic the “biggest shock to the economy in modern times” and noting that “there is a growing sense that the recovery may come more slowly than we would like” and thereby “turn liquidity problems into solvency problems.” This downside risk was highlighted in the Federal Reserve’s biannual Financial Stability Report, which was published on Friday, saying that adverse economic fallout from the pandemic rendered asset prices “vulnerable to significant price declines.” Chair Powell will again be in the spotlight this week when he testifies alongside Treasury Secretary Mnuchin before the Senate Banking Committee.
US-China Tensions Continue to Percolate
With rhetoric heating up on both sides, a hardening US stance against China on the tech and investment fronts, and threats of potential retaliation by Beijing, investors continue to ponder the ramifications of the re-intensifying friction. Over the weekend, White House advisor Peter Navarro again alleged Chinese malfeasance in dealing with the Covid-19 outbreak. Last week, the US Commerce Department moved to tighten restrictions on the supply of chips to Chinese IT giant Huawei, as Secretary Ross took to Twitter to criticize the company’s conduct. At the same time, however, the Commerce Department extended the licenses it has granted for US companies to do business with Huawei for another 90 days, but warned that this was likely the final extension. Chinese state media indicated that Beijing could retaliate against US companies through cybersecurity reviews, anti-monopoly measures, and placement on the “unreliable entities” list, as well as halting airliner purchases from Boeing. This followed Thursday’s interview in which President Trump indicated that he is focused on Chinese companies that are listed on the NYSE and Nasdaq but have not been subjected to US-standard accounting rules. Earlier last week, the US government retirement savings fund, the Thrift Savings Plan (TSP), suspended their upcoming move that would have allocated a portion of its holding to Chinese stocks in proportion to the weightings of the MSCI All Country World Index.
Additional Themes
Oil Prices Extend Their Rebound – After crashing to two-decade lows in late April, crude oil prices have staged a sharp rally off the lows amid hopes that a combination of supply cuts by OPEC and other major producers and improving demand amid economic reopening will help rebalance the oversupplied market. Reports this morning suggest that Chinese oil demand is back to pre-crisis levels after contracting nearly 20% earlier this year, with sources citing declining use of public transportation as helping boost usage. Last week marked the first time since February that US crude stockpile data registered a weekly drawdown.
This Week – The calendar for the coming days features global purchasing managers’ indexes, China’s interest rate decision, and minutes from the latest Federal Reserve meeting. Also, Fed Chair Powell and Treasury Secretary Mnuchin will testify before the Senate Banking Committee tomorrow, and Powell has another appearance on Thursday to discuss the impact of Covid-19.