Summary and Price Action Rundown
Global risk assets are continuing this week’s upbeat trend ahead of what is expected to be a historically dire US jobs report for April, as the focus remains firmly on recovery prospects, with positive earnings and better US-China atmospherics also boosting the market mood. S&P 500 futures indicate a 1.0% higher open, which would extend yesterday’s 1.2% gain that put year-to-date downside at 10.8% and the decline from February’s record high at 14.9%. Equities in the EU and Asia were higher overnight as well. Treasury yields are sinking back toward recent lows amid more troubling jobless data and cautious Fed communications, with the 10-year yield at 0.62% and longer-dated Fed fund futures projecting negative interest rates for the first time (more below). This has dented the dollar, which is falling back to the middle of its recent trading range. After rebounding sharply earlier this week, crude oil is fluctuating around three-week highs as traders weigh an improving demand outlook against the ongoing supply glut.
US Labor Market Pain Continues as Markets Reflect Negative Interest Rates
In contrast to increasingly exuberant US equity markets, real economic data remains dismal, Fed speakers are conveying deep concerns, and Treasury markets remain consistent with persistent economic doldrums. This morning, the April nonfarm payroll report is expected to reflect a historic level of job losses, with a consensus forecast of 22 million jobs lost and an understated 16.0% unemployment rate. This follows yesterday’s latest jobless claims figures which showed that 3.2 million Americans filled for initial unemployment benefits last week, compared to 3.8 million in the prior week and above market expectations of 3.0 million. Last week’s filings lifted the total reported since the beginning of the coronavirus crisis to 33.5 million, equivalent to a 22% unemployment rate. For context, the nonfarm payroll report lags the weekly unemployment claims data. The largest increases were seen in California, Texas, Georgia, and New York, while continuing jobless claims hit a new record of 22.6 million. Amid these deeply depressed figures, Fed speakers yesterday continued to highlight concerns over the outlook for the economy, Treasuries staged a robust rally, and fed fund futures for December 2020 and January 2021 for the first time moved to reflect negative interest rate policy (NIRP), which is currently in effect most notably in Japan and the EU. This price action in Treasury and fed fund futures markets is consistent with a lengthy economic trough.
Earnings Season Generally Better Than Feared but the Outlook Remains Uncertain
With the bulk of first quarter (Q1) earnings reports in the books, a preponderance of upside surprises has bolstered investor optimism in the face of low visibility into the coming quarters. Being one of the final household names left to report, Uber released its quarterly figures after yesterday’s market close, missing earnings estimates but beating revenue projections. Uber’s business has been impacted by the pandemic, to which the company attributed a $19 million revenue loss in the Rides segment. As the shelter-in-place policies were instituted, Uber’s demand for rides fell 3%. Conversely, demand for food delivery through Eats increased 54%. During the Q1 earnings call, Uber management stated that rides have experienced week-over-week growth for the past three weeks. Notably, last week alone saw a 12% increase. Uber shares soared 11% yesterday to put year-to-date upside at 4.0% and are extending gains by 7.9% in pre-market trading. With 426 of the S&P 500 companies having reported, 60% have surprised to the upside on sales and 68% have topped earnings expectations. Aggregate earnings have come in 0.7% above estimates thus far, while earnings growth is -7.1% y/y. This week marks the end of peak Q1 earnings reporting season.
Positive Signals on US-China Trade – The Chinese Ministry of Commerce and the US Trade Representative (USTR) both characterized a conference call overnight among US Trade Representative Lighthizer, Treasury Secretary Mnuchin, and Chinese Vice Premier Liu as constructive. The USTR statement indicated “good progress” and noted that “both countries fully expect to meet their obligations… in a timely manner.” This comes after President Trump has referenced the potential breakdown of the Phase One US-China trade deal in recent days, indicating that more details of Beijing’s compliance will be released over the next few weeks. For context, President Trump and some senior administration officials have blamed China for failing to stem the outbreak from Wuhan and are reportedly mulling retaliatory options.
Looking Ahead – With Q1 earnings reporting season past its peak, the focus will shift back toward economic data, which features US retail sales and industrial production for April. Both are naturally expected to reflect significant downside, but market participants have been taking historically impaired economic data in stride over the past month. Consumer sentiment for May will provide a more contemporaneous datapoint as analysts ponder prospects for recovery. Key Chinese economic data for April is also due and is forecast to show a moderate rebound.