The Market Today
Best Day for Dow in 87 Years Ahead of CARES Act
by Craig Dismuke, Dudley Carter
Discouraging Numbers Broadly but Rays of Hope: The number of confirmed cases in Italy may have reached an inflection point. Despite an additional 5,249 cases reported over the past 24 hours according to the Johns Hopkins data, the three-day trend has now dropped from 6,034 to 5,199. Most European countries and the U.S. appear to seven to ten days behind Italy, although containment measures seem to determine the duration of the outbreak, making comparisons less credible. Nonetheless, it is positive news that the Italian situation, while still quite dire, appears that it could be turning.
Congress Passes CARES Act, Sends to President: Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) late last night. Based on the WSJ’s sourced analysis, consumers could see direct checks of $1,200 per adult and $500 per child, adjusted lower as incomes cross certain thresholds. The deal is also expected to expand the criteria of those who can receive unemployment benefits, enhanced with larger payouts for a longer period of time. Tomorrow’s initial jobless claims data are expected to show a record number of Americans have already been laid off amid the economy shutting down. For the business sector, $350B is expected to be allocated for small business lending and $500B could be made available to corporations more broadly, including $50B for airlines. More directly tied to the fight against the virus, $150B would be allocated to health care investment with a same-sized check sent to state and local governments.
Coronavirus Chartbooks (Updated 9:00 a.m. CT)
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Mortgage Applications Portend Slowing Purchases: Mortgage applications for the week ending March 20 fell 29.4% on an expected 33.8% drop in refi apps and a discouraging 14.6% decline in purchase apps. Mortgage rates jumped as Treasury yields plunged. The 30-year mortgage rate, according to the MBA report, was 3.47% for March 6 report but then jumped to 3.74% for March 13 and 3.82% in today’s report. The housing market has been a positive tailwind for growth recently, but that is expected to be cut off almost as sharply as consumer retail activity.
Business Investment Slows More Quickly Than Expected: Also released this morning, durable goods orders rose 1.2% in February, driven higher by a 25.7% increase in defense capital goods. Absent this anomalous increase and a strong month for auto parts and supplies, overall activity was quite soft. Looking at the key core capital goods orders and shipments data, both disappointed expectations and point to a quicker slowdown in 1Q business investment. Orders fell 0.8% MoM while shipments fell 0.7%. Those figures are likely to plunge further in future reports.
Markets Whipsawed by Fiscal Stimulus Uncertainty: Delays on a fiscal package crushed investors’ spirits Monday, but resurgent hopes that the $2T deal may be in the final stages sent stocks surging back on Tuesday. U.S. equities opened into a strong global session that had lifted stocks across Asia and Europe by more than 4% and pushed U.S. futures to their 5% upper limit in pre-market trading. Late Monday evening Senator Schumer and Treasury Secretary Mnuchin signaled a deal was close. Adding to the optimism, data showed a second daily drop in new virus cases in Italy. That good news was later countered somewhat by an update showing the second-deadliest day in Italy since the outbreak began.
Two Sides Seemed Closer to a Deal: However, renewed hopes of a massive fiscal stimulus boost ultimately overwhelmed any negativity. When asked Tuesday morning if she believed a deal could be done within 24 hours, House Speaker Pelosi said, “I think so. Yeah, I do.” House Democrats had proposed their own stimulus bill, sparking heated back and forth with Republicans. Some Republicans believed certain sections of the House bill were political and unrelated to the crisis. Later, Senator Schumer said the final deal was on the “2-yard line.” While the Fed has unleashed a fury of measures to stave off a liquidity crisis, the consensus believes fiscal stimulus will more directly address effects of the economic sudden stop on U.S. businesses and consumers.
U.S., Global PMIs Plunged in March: Investors received a glimpse of the devastation COVID-19 has already caused the business sector in March. Markit PMIs showed a services-led contraction in U.S. activity that was sharpest since the data series began in 2009. The services index plunged 10.3 points to 39.1, dragging the composite index down 9.1 points to 40.5. The manufacturing PMI fell 1.5 points to a contractionary 49.2, but was much stronger than the 43.5 expected. Those results followed global PMI results released overnight which were equally disturbing. Composite PMIs in Australia, France, and the U.K. all plunged to all-time lows. Japan’s contraction was the sharpest since the 2011 nuclear disaster and Germany’s tumble took its index to a low back to 2009.
When Will America Get Back to Work?: While cases continued to grow exponentially outside of China, the dire economic outlook has led to a debate around how long unprecedented lockdowns of U.S. citizens should last. While several top health officials have indicated stringent social distancing may be needed for weeks from now, President Trump said, “We have to go back to work much sooner than people thought.” He cautioned that, “I’m not sure that’s going to be the day, but I would love to aim it right at Easter Sunday” to have the country “opened up and just raring to go.” The CDC’s current recommended protocol, in place on an interim basis through at least next Monday, encourages consumers to avoid gatherings of more than 10 people, going to restaurants, and other discretionary outings.
Dow Rocketed Higher in Best Day in 87 Years: A return to more normal conditions, whenever that may be, could combine with massive stimulus from the Federal government and Federal Reserve to sustain a market rebound. The Dow surged more than 11% on Tuesday in its best daily gain in the 87 years since March of 1933. The S&P 500 posted its biggest daily jump since October 2008, finishing the day up more than 9.3%. Today’s challenge will be to follow yesterday’s rally with more strength. The S&P 500 hasn’t notched back-to-back gains since February 12. Treasury yields rose in response with the 2-year yield closing 5.9 bps higher at 0.37% as the 10-year yield added 6.0 bps to 0.85%. Gold prices fell, oil rose, and upward pressure on the U.S. dollar continued to ease.
Senate Strikes a Stimulus Deal: U.S. Senators finally struck a deal (discussed above) that is expected to provide an estimated $2T of stimulus into a U.S. economy that has been paralyzed by the spread of the new coronavirus. After 48 hours of delays as lawmakers hashed out the final sticking points, Senate Majority Leader McConnell tweeted, “At last, we have a deal. …the Senate has reached a bipartisan agreement on a historic relief package for this pandemic.” In a speech before his colleagues, McConnell described the deal as a “wartime level of investment into our nation.” Senate Minority Leader Schumer later called it “the largest rescue package in American history,” adding “Help is on the way, big help and quick help.” The text of the deal is expected to be released later today followed by votes in the Senate and House. Presuming the deal is passed in both chambers, the President would sign the final agreement into law.
Markets Bought the Rumor, Sold the News: The unprecedented fiscal stimulus package should combine with massive liquidity and monetary support from the Federal Reserve to set a solid footing for the economy to bounce back once the virus passes. Despite the joint stimulus efforts, however, uncertainty is likely to persist and markets may remain volatile until the epidemiological statistics show that cases appear to be peaking in the U.S. Evidence of that dynamic showed up in the muted market response overnight to news of the stimulus agreement. Following a record day on Wall Street, S&P 500 futures were down roughly 1.1% around 7:15 a.m. CT. The 2-year and 10-year Treasury yields had edged less than 0.5 bp higher to 0.36% and 0.85%, respectively.