The Market Today
China Tensions Rise; Continuing Jobless Claims Show First Sign of Improvement
by Craig Dismuke, Dudley Carter
Vining Sparks Covid-19 Chartbook (PDF) (Link) (Updated by 9:00 a.m. CT)
Monitoring the Headlines: The focus remains on the prospects of a successful re-opening of the global economy and a significant amount of stimulus that has been launched to aid the eventual recovery. Dr. Fauci said he was “cautiously optimistic” about progress towards a vaccine and added its possible one is discovered before year’s end. If the guidelines are appropriately followed, he added, a second wave of infections is not inevitable. Globally, Switzerland will allow gatherings of up to 300 from June 6 and Ireland will review its re-opening plan on June 5. Closer to home, the Mayor of Washington D.C. said the stay-at-home order will be lifted on Friday. From a business perspective, Disney was approved to open four of its largest parks, including Magic Kingdom, on July 11. American Airlines’s CEO said he believes the worst had passed and noted an average load factor of 56% for the Memorial Day holiday. Less optimistically, Boeing announced just under 7,000 involuntary layoffs.
Jobless Claims Remain High but Signs People Are Returning to Work: Initial jobless claims for the week ending May 23 dropped from 2.45 million to 2.12 million, still historically high but lower for an eighth consecutive week. The total number of new unemployment claims over the past ten-week period now totals 40.8 million, or 27% of the total number of payrolls reported in February. However, the report also shows signs of improvement in the number of people filing continuing jobless claims, down from 24.9 million to 21.1 million. The continuing claims data cover the week of May 16, lagged by one week versus the initial claims figures. The improvement was widespread with 35 states reporting declines, but almost 80% of the decline came from just Florida and California. On a non-seasonally-adjusted basis, continuing claims dropped 76% WoW (1.6 mm) in Florida and 41% (1.4 mm) in California. While initial claims and the overall number of unemployed persons remains unfathomably high, the drop in the number of persons continuing to file for unemployment is the first sign that people are returning to work.
1Q GDP Revised Down from -4.8% to -5.0% on Drop in Inventories: Also released this morning, the 1Q GDP report was revised down from -4.8% to -5.0% in the first revision. On a positive note, personal consumption was revised up from -7.6% to -6.8%. However, inventories were marked significantly lower, down $50.9 billion from the initial estimate, likely the result of the challenges for the global supply chain and a stockpiling of goods which began most notably in March.
Business Investment in Equipment Falls Less Than Expected in Preliminary April Report: The preliminary look at durable goods orders for the month of April showed a 17.2% drop in orders, weighed down by an $8.5 billion drop in non-defense aircraft orders (following a $16 billion decline in March). Excluding transportation items, orders for goods designed to last more than three years fell just 7.4% versus expectations for a 15.0% decline. Business investment held in better than expected, once again. Core capital goods orders excluding defense and aircraft items, a proxy for business investment in equipment, fell just 5.8% versus expectations for a 10.0% decline.
Pending Home Sales, Kansas City Fed Index: At 9:00 a.m. CT, the April pending home sales report is expected to show another 17% drop in sales. The index fell 20.8% in March. At 10:00 a.m., the Kansas City Fed Manufacturing index is expected to continue the run of less-bad regional Fed indices.
Stocks Climbed Again: The S&P 500 quickly erased a 1% opening jump before finding its footing, flipping higher before lunch and climbing steadily until the close. Futures had posted solid overnight gains alongside a rally across Europe after the European Commission proposed a recovery plan worth 750 billion euros in loans and grants. The signal for strong stimulus added to growing confidence about the global economy re-opening. The turn up from the mid-morning bottom was briefly interrupted by the biggest headline of the day. Just before 11 a.m. CT, Secretary of State Pompeo issued a statement saying Hong Kong was no longer autonomous from China (more below). Markets, however, quickly recovered the ensuing dip and the S&P 500 finished up 1.5% at its high point of the day. The close above 3,000 was the index’s first since March 5 and led by financial and industrial companies.
Treasury Yields Continue to Balance Optimism and Uncertainty: Treasury yields, already lower following supportive comments on yield-curve control from a key Fed official, were slower to recover after tracking equities lower. Still, by the close the yield curve was well off the lows. After an up-and-down day, the 2-year yield closed up 1.6 bps after having dipped 0.6 bps. The 10-year yield edged 1.5 bp lower after a 3.9-bp slide in the morning.
China Approves National Security Law for Hong Kong: China moved forward and approved new legislation on Thursday aimed at increasing its national security interest in Hong Kong. The bill, seen by most outside of China as a threat to Hong Kong’s relative independence, has sparked new protests in the city and drawn the ire of the U.S. government (more below). The ever-growing tensions knocked 0.7% off of Hong Kong’s Hang Seng.
Optimism Continues to Win Out: While they also limited optimism elsewhere, markets outside of Asia were relatively sanguine, apparently more focused on the economy re-opening and increased stimulus. Europe’s Stoxx rose more than 1%, the euro held near an eight-week high against the U.S. dollar, and peripheral yields remained lower after yesterday’s stimulus proposal from the European Commission. At 7:35 a.m. CT, Treasury yields and equity futures were mixed but little changed.
U.S. Says Hong Kong No Longer Autonomous from China: Secretary of State Pompeo issued a statement Wednesday saying that, “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China,” a decision which could impact Hong Kong’s special trading agreement with the U.S. It also risks aggravating U.S.-China tensions which have flared in recent weeks and kept optimism around economic re-opening in check. A Chinese official had earlier pledged “countermeasures” against any country that “insists on harming China’s interest,” calling the national security law “purely China’s internal affair.” Also related to China, a Canadian Judge threw out Huawei CFO’s request to dismiss the U.S.’s extradition case which has kept her under house arrest in Vancouver for roughly 18 months.
Williams Said Fed is Weighing Yield-Curve Control: New York Fed President John Williams said Wednesday that the Fed is “thinking very hard about” possibly using yield-curve control to “complement forward guidance and our other policy actions.” The topic is being considered as the Fed seeks more policy potency to aid a recovery with its key policy rate already at the effective lower bound. Williams said, “maybe we are near the bottom in terms of the economic downturn, …I expect to see a pretty significant rebound in the second half of this year.”
Bullard Could See Swift Recovery: St. Louis Fed President Bullard pushed back a bit against the efficacy of yield-curve control in today’s low-rate environment with the Fed having clearly signaled they don’t expect to raise rates “any time soon.” He expects the economy to transition to growth next quarter and sees a higher likelihood of a swift recovery than in past downturns. Looking ahead, he prefers state-based forward guidance over calendar-based and said the government may need to pare back unemployment assistance in August to encourage people to return to work.
Beige Book Describes Historic Slowdown, Highlights Uncertain Hopes for the Future: Except for some Districts noting “recent improvement” in auto sales, the Fed’s Beige Book, covering developments through May 18, painted a dreary picture. Best summarized in the first and last sentences of the activity summary, “Economic activity declined in all Districts – falling sharply in most” while “the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.” The report, which covered the reference week for May’s payroll report, said “Employment continued to decrease in all districts, including steep losses in most” while wage pressures were mixed. Away from the economic assessment, the Book noted “strong demand for PPP loans” but also pointed out unintended difficulties created by “generous unemployment benefits.”