The Market Today

Vaccine Hopes Fuel Optimism; Fed Chair Powell to Testify at SBC


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE


Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT


Monitoring the Headline

Vaccine Hopes Top Monday’s Upbeat Headlines: The big news came ahead of U.S. trading on a report of positive phase one trial results for Moderna’s experimental COVID-19 vaccine. However, the upbeat tone persisted throughout the day with focus on the gradual re-opening of the global economy. EU leaders are discussing rules that could allow for summer travel within the bloc. Scotland, Mexico, and Slovakia all made announcements indicating optimism about loosening restrictions. Governor Cuomo said western New York would be able to open today and announced the fewest new cases for the state since March 17. New Jersey announced additional outdoor businesses that could re-open. California relaxed criteria for resuming some activity and said 53 of the state’s 58 counties satisfied the updated guidelines. Texas said bars could start serving at limited capacity on Friday and announced that certain youth activities such as summer camps and little league could begin.

Talk from Global Officials: France and Germany jointly proposed a 500 billion Euro recovery plan to provide relief funds to countries that would be shared and spread across future EU budgets instead of repaid directly by the recipients. White House economic adviser Kudlow believes things are starting to turn for the better and sees “little glimmers” of economic activity returning. President Trump lauded the news on the vaccine front and mentioned the idea of a possible tax credit for restaurants at a meeting with top industry executives. Also catching the wires by surprise, he announced he has been taken hydroxychloroquine for over a week. On stimulus, the IRS and Treasury will soon send roughly $4 million in stimulus payments on prepaid debit cards to those with no direct deposit information on file.


TODAY’S CALENDAR

New Construction Activity Shuttered, Hopefully Temporarily: New housing starts fell another 30.2% in April bringing the two-month total decline to 45%.  The weakness has come from both single- and multi-family activity with single-family starts down 25% in April and multi-family down 40.5%.  Filings for new building permits also plunged, down 20.8% in April.  It appears many regions saw an almost-full stop on new construction activity beginning in mid-March . This will almost certainly take one of the few strong tailwinds to growth and turn it into a negative factor in 2Q.

Fed Chair Powell Testifies: Fed Chair Powell will testify today before the Senate Banking Committee at 9:00 a.m. CT.  The prepared remarks were released last night (detailed below).  Also on the calendar today are Rosengren and Kashkari.


YESTERDAY’S TRADING

Stocks Surged as Vaccine Hopes Sparked Sharp Risk-On Tone: U.S. equities surged more than 3% and the Treasury curve steepened on higher yields following a pre-market report of positive results from a possible vaccine candidate. European equities and U.S. futures were already up more than 2.5% overnight as the world economy continues to gradually re-open and after Fed Chair Powell’s Sunday comments about a willingness to continue supporting the U.S. economy. However, risk markets made new highs around 6:30 a.m. CT on a headline that Moderna’s experimental vaccine had shown positive effects in a phase one trial. The major indexes leapt at the open of U.S. trading and climbed gradually throughout the day, with the Dow rallying 3.9% and the S&P 500 gaining 3.2% to a ten-week high.

Yields Perked Up as Longer Maturities Crept Through the Top of Recent Range: Cyclical stocks led all gains with energy companies at the front of the pack as U.S. crude settled up 8.1% at $31.82 per barrel, the highest since March 11. Industrials closed in a close second as airline stocks shot higher by double-digits and financials rounded out the top three as yields rose and steepened. The 2-year Treasury yield, locked in by expectations for the Fed to keep rates low for a long time, pressed 3.2 bps higher to 0.18%, its biggest move up since April 6. The 10-year yield doubled that increase with an 8.3-bp jump that left the benchmark note yield at 0.73%, its highest mark since April 14. The spread between the two widened out to more than 54 bps for the first time since March 26.


OVERNIGHT TRADING

Asia Plays Catch-Up While Equities Elsewhere Ease after Strong Monday Performance: Equites jumped across Asia Pacific in a catch-up response to yesterday’s news about a possible vaccine while markets in Europe and the U.S. edged back following a sharp rally to start the week. The Moderna news broke Monday after Asian markets closed but lifted the MSCI Asia Pacific index 1.8% on Tuesday. In Europe, however, the Stoxx 600 had slipped 0.7% just before 7 a.m. CT after surging more than 4% on Monday. Data showed car registrations across the monetary union plummeted by a record 76% in April while a May survey of German economic confidence surprised to the high side of estimates on a notable improvement in expectations.

U.S. Futures Inch Lower after Mixed Earnings from Major Essential Businesses: U.S. equities were whipped about by corporate earnings from two Dow components which have remained open as essential businesses during the outbreak. Shares of Home Depot fell 1.5% in pre-market trading as sales topped expectations but profits missed due to increased costs of operating in the unusual environment. Walmart on the other hand, a beneficiary of consumers prepping to stay at home, beat estimates for sales and earnings and rose more than 4% in response. Index futures were marginally weaker but little changed at 7 a.m. While European yields continued to shift in response to prospects of a 500 billion Euro recovery plan, Treasury yields leveled off around unchanged before Fed Chair Powell’s Senate testimony.


NOTEWORTHY NEWS

Home Builder Confidence Creeps Back up In May: The NAHB’s Housing Market Index recovered a bit more than expected in May after a colossal 42-point collapse sent it to its lowest level in nearly eight years in April. The 7-point improvement to 37 left the index significantly depressed relative to March’s reading of 72 and the 2019 average of 66. However, each of the three underlying indexes gained as stay-at-home orders began to lapse across the country. A reading of current sales rose from 36 to 42 while sales expectations over the next six months edged up from 36 to 46. Those increases occurred alongside some signs of life in foot traffic as potential buyers eased out from under restrictions to walk through homes that were for sale, with the associated index rising from 13 to 21.

Powell to Explain Fed’s Response to Unprecedented Economic Shock: In anticipation of his testimony before the Senate Banking panel later today, the Federal Reserve released Chair Powell’s prepared remarks on Monday afternoon. As expected, most of the ink was spent on explaining the Fed’s actions since it cut rates to zero and launched numerous liquidity and lending facilities as part of a joint effort with the Treasury to ensure smooth market functioning and keep the economy afloat during the COVID-19 pandemic. Consistent with his message in recent appearances, Powell said “the scope and speed of this downturn are without modern precedent” and pledged that the Fed is “committed to using our full range of tools to support the economy in this challenging time.” There is nothing new in the prepared remains and any attention-grabbing headlines will emanate from the Q&A.


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