Morning Market Brief 3-27-2020

Summary and Price Action Rundown

Global risk assets are retracing a portion of their three-day rally this morning as investors continue to await passage of the pandemic relief bill through the House of Representatives, while pondering the efficacy of even this forceful fiscal support amid a continued rise in Covid-19 infection rates. S&P 500 futures indicate a 1.9% loss at the open, which would partly retrace its three-day rally of 17.6%, which brought year-to-date downside to 18.6% and its decline from mid-February’s record high to 22.3%. The acute market volatility of the past few weeks has eased amid a confluence of supportive factors, including more aggressive Fed/global central bank accommodation, expectations of massive US fiscal stimulus, and hopes for decelerating contagion figures in Italy and New York (though recent new infection figures are less encouraging). Traders are also citing quarter-end rebalancing by large institutional investors as underpinning demand for US stocks over the past three days. EU and Asian equities were mixed overnight. EU sovereign bonds are choppy after yesterday’s rally, while Treasury yields continue to head lower, with the 10-year yield at 0.76%. The dollar is pausing its retreat from multi-year highs. Oil prices remain under pressure, with Brent crude around $26.

Congress Readies Massive US Fiscal Support as Investors Shift Their Focus to Execution

With the House set to pass the phase three coronavirus relief bill today or tomorrow, analysts continue to debate the degree to which this major US fiscal firepower can cushion the impact of the pandemic. Earlier this week, the Senate managed to pass the phase three relief bill (CARES Act) with unanimous consent and the House is poised to approve it over the coming day or two. The bill totals $2.2 trillion and includes direct support for households ($301 billion), expanded unemployment insurance ($250 billion), credit support to companies to backstop lending facilities by the Federal Reserve ($500 billion), concessionary loans to small businesses ($367 billion), money for hospitals and healthcare providers ($130 billion), emergency education and infrastructure finance ($55 billion), and agriculture assistance ($48 billion). The bill grants greater flexibility to banks in lending to small businesses as well as forbearance for holders of federally-backed mortgages through year-end in cases of pandemic-related financial hardship. The timeline for disbursement of the relief assistance varies widely across the many segments and analysts are pondering the ability of different levels of government to translate the budget allocations into actual expenditures. On one hand, Secretary Mnuchin indicated that direct deposits can be implemented for many individuals within weeks, whereas some businesses will not receive relief for months until they adjust for reduced payroll taxes. Congressional leadership on both sides have informed their members that up to two more fiscal packages may be needed during the coming weeks of this pandemic.
Investors Digest an Unprecedented Rise in US Unemployment Claims

Early data for March is revealing a dramatic economic deterioration around the globe, and yesterday morning’s release of last week’s new US unemployment filings showed a stunning increase. A record 3.28 million people registered for unemployment benefits in the week of March 15th, surging from the 282,000 registering the week prior. This figure was not only a new historical peak but a multiple of previous highs in weekly seasonally adjusted unemployment surges such as in 1982 (695,000) and 2009 (665,000). This ends a decade of sustained job growth that saw US employers having added jobs for a consecutive 113 months. Due to the scope of the coronavirus impact, Congress is considering expanding unemployment benefits to contract workers and self-employed persons. It remains to be seen whether this spike in unemployment and subsequent response will resemble the 1980s surge and relatively quick recovery or the more drawn out jobless trends of 2008-09 and the 1930’s. Not all sectors are evenly hit; retail is seeking at least 500,000 new workers as demand exceeds production capacities. Next week’s data will provide more insight on the economic fallout (more below).

Additional Themes

Powell Reassures on Stimulus – Federal Reserve Chair Powell alluded to additional measures available to the Fed in providing targeted credit “where it should be offered but is not” in his remarks yesterday morning on the Today Show, stating that “we’re not going to run out of ammunition.” He noted the US economy “may well be in a recession” but suggested that there should be “a good rebound on the other side of that.”

Looking Ahead – Next week brings some additional key datapoints on how the pandemic and the accompanying public health responses are impacting the economy. March nonfarm payroll data, due next Friday, is forecast to be one of the worst readings on record, while more global purchasing managers’ indexes (PMIs) for March are expected to reflect deepening contractions. Meanwhile, analysts await a decision from President Trump regarding his administration’s position on restarting portions of the economy amid questions about his authority to do so.