The Market Today
10 Million File New Unemployment Claims in Just Two Weeks
by Craig Dismuke, Dudley Carter
The coronavirus has wreaked more havoc on the U.S. economy than expected. We have now revised our growth forecast, penciling in a 7% contraction in 1Q followed by a 14% contraction in 2Q. We note that they are in pencil because there remains is a high degree of uncertainty accompanying these projections. We did not change our interest rate forecast, continuing to believe the most likely outcomes are Fed Funds near-zero through the middle of next year and the 10-year yield holding below 1.00% through 2020. We will detail our forecast considerations in our 2Q Economic Outlook Webinar next Tuesday (register here).
Coronavirus Chartbooks (Updated by 9:30 a.m. CT)
PowerPoint: Coronavirus Chartbook (PWPT)
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
Initial Jobless Claims Rise 6.6 Million in One Week: Last week, initial jobless claims surpassed their previous record-high of 695k new filings in one week, rising to 3.28 million. This week’s data, covering the week ending March 28, showed claims more than doubled from 3.28 million. New filings rose to 6.65 million, almost ten times the pre-coronavirus record. Our baseline forecast (referenced above) calls for unemployment to reach 14% by the end of June. In that projection, we anticipate 11 million job losses in April, 5.5 million in May, and 1.5 million in June. The initial jobless claims data indicate that our estimates may be on the conservative side.
Job Cut Announcements Increase: More evidence of the abrupt disruption to the labor market, data from Challenger, Gray & Christmas showed 222,288 new job-cut announcements in March. This is up from 56,660 in February and up 267% OYA. The report notes that this figure is also on the conservative side. According to the report, “The March figures include job cuts announced by specific companies in the United States and tracked by Challenger. … It does not include the hundreds of thousands of workers who were furloughed in March.”
Global Trade Continues to Contract: Also released this morning, the monthly trade deficit fell another $5.6 billion in February. The monthly deficit is now the smallest it has been since 2016. The deficit declined as overall trade volume continued to contract. Exports fell 0.4% MoM while imports dropped 2.5%. By country, evidence of the global supply chain disruption was seen in the $4.0 billion reduction in the monthly goods deficit with China alone.
S&P 500 Posted Biggest Decline in Ten Days As Virus Worries Return: U.S. stocks sold off sharply to start the second quarter as nervousness around the human and economic tolls of COVID-19 weighed on global sentiment on the first trading day of April. An early recovery from an opening drop proved to be a cruel sort of April Fools’ joke as the S&P 500 reversed lower just after 10 a.m. and slid steadily into the close. The turnabout occurred around the time a headline hit that U.S. intelligence had reportedly told the White House that China intentionally underreported the number of COVID cases and deaths in the country. All eleven sectors slumped to drag the broader index down 4.4% on the day and more than 27% below its mid-February peak. Global equities had sold off earlier after the White House warned on Tuesday that virus-related deaths could climb into the hundreds of thousands and more foreign PMIs outside of China reflected significant economic damage. On Wednesday, ADP reported the early stages of what is expected to be an incredible level of job loss in the weeks and months ahead and the ISM manufacturing survey showed a clear impact to activity already (more below).
Treasury Yields Fell in Flight to Quality and on Change to Leverage Ratio Rule: Treasury yields fell amid the flight to quality with the 2-year yield ending down 3.9 bps at 0.21%, a new low back to May 2013. The 5-year yield dropped 2.8 bps to a new record low of 0.35% and the 10-year yield fell 8.6 bps to 0.58%, just 4 bps above its all-time low. Yields were already lower for the day but fell further just before the close after the Fed announced a change to a leverage ratio applied to large banks. Effective immediately, the supplementary leverage ratio calculation required for the largest banks will temporarily exclude, until March 31, 2021, U.S. Treasurys and deposits at Federal Reserve Banks. According to the Fed’s statement, “The change would temporarily decrease tier 1 capital requirements of holding companies by approximately 2 percent in aggregate” and “increase banking organizations’ ability to provide credit to households and businesses.”
Tracking the Headlines: Germany and Italy both extended nationwide lockdowns until at least after Easter and said it was too early to loosen up social distancing restrictions. New cases in Italy ticked up but deaths fell to the lowest level in six days. In the U.S., governors from Florida, Pennsylvania, Nevada, and Mississippi all announced statewide stay-at-home orders. Senate Minority Leader Schumer became the latest politician to say another round of stimulus would be needed and that a fourth deal could be delivered by the end of April. Wimbledon became the latest sports casualty as officials were forced to delay the timing of the tournament for the first time since World War II.
U.S. Equity Futures Rise, Treasury Yield Contained in Mixed Global Session: U.S. equity futures strengthened during a mixed global session Thursday that has kept Treasury yields largely contained but seen oil prices surge by double digits. With what is sure to be an unusual quarterly earnings season set to begin in days, investors remain focused on the economic impact of the global virus spread which has infected nearly one million people worldwide. Markets in the Asia-Pacific region moved in opposite directions with Australian equities among the worst performers after a measure of business confidence slid to a new low back to 2009. European equities generally inched higher to lift the Stoxx Europe 600 by 0.4%, although Spain’s IBEX lagged behind with a 0.5% drop. Virus deaths in Spain rose by the most in a day yet and jobless claims rose by the most on record in March.
Oil Surges on Hopes to and End of Saudi-Russian Spat: Ahead of another expected surge in U.S. unemployment claims, S&P 500 futures had risen 1.9% before 7 a.m. CT after the index yesterday registered its worst day in two weeks. Oil was the most volatile major asset overnight as both Brent and U.S. WTI jumped more than 10%. President Trump addressed the ongoing production spat between Saudi Arabia and Russia, saying “I do believe there’s a way that that can be solved or pretty well solved” in a “few days.” Just before the weekly jobless claims were released, the 2-year Treasury yield had added 1.4 bps to 0.22% while the 10-year yield had inched up less than 1 bp to 0.59%. After jobless claims passed even the most pessimistic economist’s estimate, Treasury yields and equity futures both pulled back from pre-release levels, but only marginally.
ISM’s Steady Headline Masks Significant Virus Disruptions: The ISM’s Manufacturing Index held up much better than expected in March, but was misleading in its signal about how COVID-19 has impacted activity. The headline PMI fell 1 point to 49.1, falling back into contraction after a couple of months of expansionary relief for the sector since trade tensions between the U.S. and China calmed late in 2019. The result, however, would have been much worse had it not been for a significant slowdown in supplier deliveries. The ISM’s methodology, constructed for normal times, considers slower delivery times to be a sign of faster economic activity causing supply-side strains. However, these are not normal times and the mathematical support from slower deliveries skews the signal. Excluding that effect, the headline would have fallen more steeply and closer to expectations of 44.5. Providing a more realistic picture of COVID’s detrimental effects, new orders slumped 7.6 points to 42.2 (lowest since 2009), production dropped 2.6 points to 47.7, and employment fell 3.1 points to 43.8 (lowest since 2009). Those contractionary readings were consistent with worries in the comments section from multiple industry leaders about how disruptive the virus had been to their businesses.