Summary and Price Action Rundown
Global risk assets are pausing last week’s rally this morning as investors monitor news and data for indications of progress on economic reopening. S&P 500 futures point to a 0.7% lower open, which would pare last week’s 3.5% rally that put year-to-date downside at 9.3% and the decline from February’s record high at 13.5%. Equities in the EU and Asia were mixed overnight. Longer-dated Treasury yields are hovering above recent lows despite troubling jobless data and cautious Fed communications, with the 10-year yield at 0.69%. Meanwhile, the dollar is rebounding this morning but remains near the middle of its recent trading range. After rebounding sharply last week, crude oil is backsliding but remains near one-month highs.
Investors Ponder Reopening Efforts Amid Depressed Economic Data
With financial markets conveying mixed signals on the outlook for the recovery, market participants will be more reactive to contemporaneous indicators than traditional economic data, which is considered backward-looking. On Friday, the nonfarm payroll report indicated that the US economy lost 20.5 million jobs in April, below consensus estimates of 22 million, and following 870K losses in March. This was the largest drop ever, and job losses were widespread, with 7.7 million lay-offs in leisure and hospitality and 5.5 million in food services and drinking places. The unemployment rate jumped to 14.7%, the highest in the history of the series and compared to market expectations of 16.0%. The number of unemployed persons rose by 15.9 million to 23.1 million. However, the real rate is another 5% higher, as the official figures does not include people who are not looking for a job as unemployed. 18.1 million of the newly unemployed characterized themselves as only temporarily laid off and expect to return to work once restrictions are loosened. Despite these deeply depressed figures, US equities closed the week on a high note, with the S&P 500 rising 1.7% for a 3.5% weekly gain to cut year-to-date losses under 10%. Treasury markets, on the other hand, remained consistent with a lengthy economic trough. Notably, fed fund futures for December 2020 and January 2021 for the first time last week moved to reflect negative interest rate policy (NIRP), which is currently in effect most notably in Japan and the EU. With traditional economic data viewed as stale, investors will be highly attuned to signs of progress or slippage on economic reopening. News over the weekend covered Shanghai Disneyland reopening but also Seoul closing bars and nightclubs after a secondary outbreak, lockdown of another Chinese city, and infections among White House staff, suggesting that economic reopening is likely to be uneven and challenging.
Earnings Season Wraps Up as Optimism is Tempered by Uncertainty
With the bulk of first quarter (Q1) earnings reports in the books, equity investors took a “glass half full” approach to uneven results and widely withdrawn guidance. With just around 86% of the S&P 500 companies having reported their Q1 earnings, the results so far have marked one of the most challenged earnings seasons in the past decade, and the signs are pointing to an even more difficult Q2. Nevertheless, equity markets continued their ongoing uptrend amid some upbeat management commentary and hopes of a summer rebound. As of Friday, 66% of reporting companies have beaten earnings estimates, led by consumer staples and materials while 58% have topped revenue estimates, led by the health care and information technology sectors, which are the lowest ratios since the 2008 financial crisis. The blended earnings growth for the S&P 500, the mix between the earnings that have released and the projections for those that have not, is at -13.6% year-over-year, which represents the largest quarterly year-over-year earnings loss since Q3 2009. The blended revenue growth of 0.6% would be the lowest since Q2 2016. Headline results for the current quarter are expected to be considerably worse, as lockdowns became more widespread in April and carried into May, but investors will be expecting evidence of a recovery to feature prominently in Q2 results.
China in Focus – Despite threats of retaliation against China from the White House for alleged malfeasance over the Covid-19 outbreak, the atmospherics of the US-China trade relationship improved last week after the Office of the US Trade Representative (USTR) and the Chinese Ministry of Commerce both characterized a conference call early Friday as positive. President Trump has indicated that more details of Beijing’s trade deal compliance will be released perhaps as early as this week. Meanwhile, China published April aggregate financing figures, which showed credit extension and broad money supply outpacing estimates. Later this week, retail sales, industrial production, and fixed asset investment data for last month are due.
Fed Policy Uncertainty – After fed fund futures briefly reflected NIRP by year-end, the announcement of a speech this Wednesday by Fed Chair Powell had traders guessing that he would use the opportunity to tamp down any such expectations. Still, fed officials have been unanimous in emphasizing downside economic risks and the need for more monetary easing.