The Market Today

ADP Report Shows Economy Lost 15% of Private Sector Payrolls in April


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE


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


Monitoring the Headlines

Corporate and Other: Before markets opened, Pfizer announced that it and Germany’s BioNTech had launched an experimental vaccine trial on U.S. patients. A global airline industry group said data shows very few in-flight transmissions and said distancing on flights could force fares up 50% for most carriers to break even with reduced loads. Airbnb announced it was cutting 25% of its workers and expects revenue to fall more than 50% in 2020. Shanghai Disneyland will open May 11. The first fraud charges related in the SBA’s PPP program were announced and the appointee to serve as inspector general overseeing the stimulus appeared before the Senate.

The Virus: Former FDA Commissioner Gottlieb said cases haven’t declined as expected under stay-at-home restrictions and the popular IHME model doubled its death projection based on loosening restrictions. Illinois announced a phased reopening framework, Texas loosened more restrictions, and North Carolina’s governor signed an order to enter phase one on May 8. New York’s death toll was revised up 1,700 for uncounted cases in nursing homes but Governor Cuomo said his state is on the “other side of the mountain.” In Europe, the U.K. overtook Italy as having the deadliest outbreak.

White House Task Force in Focus: President Trump confirmed Dr. Fauci will testify before the Senate as Senator Schumer called for Dr. Birx, Treasury Secretary Mnuchin, and Fed Chair Powell to all appear. Vice President Pence confirmed a New York Times report that the White House’s virus task force was being wound down. President Trump said in the afternoon a new task force should be focused on safety as the country reopens.


TODAY’S CALENDAR

Unimaginable Job Loss – 20 Million Lost Payrolls: The ADP Employment report showed 20.2 million private payrolls were lost in the month of April, a record contraction for the labor market.  During the Great Recession, 8.79 million private sector jobs were lost spanning a 26-month period.  In just one month, over 15% of all private sector jobs disappeared despite federal programs incentivizing businesses to retain employees on payroll. Leisure and hospitality workers bore the brunt of the impact, losing 8.6 million jobs.  Heading into Friday’s nonfarm payroll report from the BLS, expectations are that it will also show more than 20 million lost payrolls.  April was likely the hardest-hit month for job loss, although May is also expected to show millions of lost payrolls. Moreover, according to the ADP release, April’s figures do not capture the full impact of the virus.

Encouraging Signs for Housing: Beneath the uninspiring 0.1% increase in mortgage applications for the week ending ending May 1 is an encouraging 5.8% increase in purchase apps.  While purchase apps are still down 19% year-over-year, this marks the third-consecutive weekly increase and is good news for an important sector of the economy that had momentum pre-virus.  Also in this morning’s MBA report, the average 30-year mortgage rate dropped to a new, record-low 3.40%.


YESTERDAY’S TRADING

Stocks Rose but Cut Gains on Clarida’s Comments: The S&P 500 rose 0.9% on Tuesday as investors shrugged off a historically bad services ISM survey (more below), opting to hope instead on economic reopenings to limit further devastation. However, the index was up as much as 1.8% in the final hour of trading before Fed Vice Chair Clarida reminded investors that unemployment is likely to climb to levels last seen in the 1940s (more below). Despite him also projecting a second-half recovery, stocks halved their gains in the final forty-five minutes of trading. Health care led ten of eleven sectors higher in a day of broad-based strength.

Treasury Yields Inched Up but Remained Uninteresting: Treasury yields inched higher but remained in a near-moribund state that began in April after the Fed launched its barrage of stimulus efforts in March. The 2-year yield added 0.6 bps to 0.19% while the 10-year yield rose 2.8 bps to 0.66%. In other markets, U.S. WTI surged 20.5% to close at $24.56, registering five consecutive gains for the first time since July 2019 and its highest close since April 8.


OVERNIGHT TRADING

Global Markets More Cautious Ahead of ADP: This week’s upbeat tone in global markets eased some on Wednesday as investors faced more weak data and waited to see ADP’s estimate of April’s labor market destruction. Japan remained closed for a holiday while the rest of Asia posted a 0.8% gain. A report indicated China was considering foregoing a 2020 GDP target because of the global virus disruption. Europe’s Stoxx 600 was clinging to a 0.3% gain as stocks in the region struggled after Tuesday’s bounce. Composite PMIs in Italy and Spain came in at 10.9 and 9.2 (out of 100), with Italy’s actually topping expectations. The Eurozone’s PMI was revised up a tick from 13.5 to 13.6. The European Commission updated its forecast on Wednesday to project a 7.7% contraction in the EU in 2020 (previously +1.4%) followed by a 6.3% rebound in 2021. Global yields were higher ahead of the ADP data with a focus on supply announcements in both the Europe and U.S. Just before the ADP release, Dow futures were up 0.5% with the 10-year yield +2.2 bps to 0.69%. Those moves mostly held at 7:30 a.m. CT even after confirmation of the historic job loss.


NOTEWORTHY NEWS

Severe ISM Services Slump Even Worse When Supplier Deliveries Skew Corrected: The ISM’s Non-Manufacturing Index plunged in April and, as expected, was propped up by a misleading spike in the supplier deliveries index. The headline index slumped 10.7 points to 41.8, contracting for the first time since 2009. Had it not been for the 16.2-point surge in the supplier deliveries index to an all-time high, reflecting broken supply chains as opposed to bustling supply chains, the index would have rivaled its all-time low from November 2008. More apropos, current activity, new orders, and employment all plummeted by record amounts to record lows. Other indexes reflected the virus disruptions as orders backlog fell sharply, new export orders careened deeper into contraction, and inventories were reported as “too high.”

Clarida Said Fed “Building a Bridge” but May Need to Do More: Fed Vice Chair Clarida echoed Chair Powell’s press conference message last week, saying the current recession is going to lead to “very elevated” unemployment but the Fed is “building a bridge” to the other side of the nationwide lockdowns. It will take time for the labor market to heal but he expects a “recovery could begin in the second half of the year” as businesses reopen. Also similar to Powell’s messaging, he said the Fed’s actions have loosened up credit in the private sector, but it may be that the Fed and fiscal officials need to do more, an action both entities have the capacity to take.

Evans Sees Rates Low for a Long Time: Chicago Fed President Evans said forward guidance is unnecessary because he “can’t imagine that anybody is expecting the Fed to raise interest rates over any relevant time horizon.” Growth could pick up as restrictions are eased, but it “will likely be slow at first because of continued social distancing and other safety precautions.” “A lot of things have to go right” if unemployment is to fall back to 5% by the end of next year. If needed during the recovery, future asset purchases “could involve elements of yield-curve control.”

Fed’s Bullard Sees Rates at Zero for Years: Fed President Bullard said the markets are priced for rates to stay at zero for “years,” not “months,” a position he said he has no reason to question. He called the fiscal response to the virus crisis “quite strong,” adding that the Fed’s “very sensible” actions are aimed at keeping the health crisis from becoming a financial crisis. He said the current economic shutdown may cause unemployment to move beyond 20% and can’t last into the second half of the year without causing longer-lasting problems. Borrowing a phrase from President Trump, he sees the third quarter as a “transition quarter.”


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