The Market Today
Countries Respond to Rapidly Escalating Virus Problem
by Craig Dismuke, Dudley Carter
Coronavirus Update: The next week will be critical for U.S. efforts to contain the coronavirus. Confirmed cases now exceed 1,000 domestically including 29 deaths. The growth trajectory seen in other countries (see Chart of the Day) shows that once a country surpasses 1,000 cases, they tend to rapidly escalate to 10,000 cases. For many countries, this is the point at which the healthcare system begins to be stressed.
Mortgage Applications Jump As Rates Fall: Mortgage applications for the week ending March 6 jumped 55.4% on a 79% increase in refi apps and a 5.6% gain in purchase apps. The 4-week average for refi apps is now up to its highest level since 2013, portending a wave of prepayments for mortgage-backed securities. According to the MBA report, 30-year mortgage rates dropped from 3.57% to 3.47%, matching the lowest rate on record.
Consumer Prices Remain Firm in February but Outlook for Inflation Unclear: Consumer price inflation was a mixed bag in February in a report that is likely to have little impact on monetary policy decisions. While consumer inflation had become the key metric to watch, the world has changed over the past month. Going forward, there are expected to be countervailing pressures on prices from the supply chain disruption, a disruption in demand, and the crash of oil prices. In an environment plagued by such uncertainty, the inflation outlook will become more important than the current data. Core prices rose 0.2% MoM bringing the YoY rate up from 2.3% to 2.4%. Headline prices were dragged down by a 2.2% drop in energy prices (which is expected to fall further in March) but buoyed by firming of food prices. All told, headline inflation pulled back from 2.5% YoY to 2.3%. In the details, it was the strongest month for core goods inflation since July and core services inflation is now running at its fastest year-over-year growth rate since mid-2018. Housing inflation was softer despite a 2.0% increase in lodging away from home. Medical care prices increased at just one-third of their 12-month trend. And transportation prices were finally firmer on increases in new cars, used cars, and vehicle maintenance.
Volatility Continued to Whipsaw Markets: Volatility persisted across U.S. markets Tuesday as stocks snapped back in a partial recovery of Monday’s decline and Treasury yields completely unwound yesterday’s tumble. Stocks posted their worst decline since 2008 to start the week as collapsing oil prices compounded existing worries around the global spread of COVID-19. Saudi Arabia confirmed it will raise daily production to a record level in April, an act that was spurred by a disagreement with Russia over the weekend that led to oil prices collapsing 30% Monday, the biggest drop since 1991. Russia said Tuesday that it too could significantly ramp up production in the weeks ahead. Despite the escalation, oil prices surged by more than 10% Tuesday amid a broader recovery of investor sentiment. After dropping 20% Monday to lead all S&P sector losses, energy companies climbed back 5.0% on Tuesday.
Treasury Yields Surged Back as Stocks Recovered: The broader index rose 4.9% after falling 7.6% the day before, with all eleven sectors clawing back a portion of the prior day’s decline. The broad recovery in sentiment followed bipartisan discussions in Washington as to what the appropriate fiscal response should be. President Trump said he expects to help industries heavily impacted by the virus and, while it was mostly dismissed by lawmakers from both parties, said he would like the payroll tax to be waived through the end of the year. Technology and financial companies both gained more than 6%, with the latter rallying back as interest rates erased yesterday’s sharp drop. The 2-year yield fell 12.7 bps Monday but bounced back 15.3 bps Tuesday to finish at 0.54%. The 10-year yield jumped 26.2 bps to 0.80% after falling 22.1 bps to 0.54% to start the week. At one point in Monday’s trading, the 10-year yield dropped to as far as 0.31%, an all-time low. The 30-year yield rose 28.5 to 1.28% bps after closing below 1.00% on Monday for the first time ever.
U.K. Becomes the Latest Country to Announce Virus-Related Stimulus: Global markets continue to be swung about by the uncertain economic outlook created by the continued spread of COVID-19 and the competing response from global fiscal and monetary policymakers. Stocks sold off across Asia to drag a regional index down 0.5% while equities in Europe were generally stronger. The U.K. added itself to a growing list of countries whose government and central bank have announced stimulus measures to help treat the economic symptoms of the new coronavirus. In an unscheduled decision, the Bank of England announced a 50-bp rate cut to 0.25%, introduced a new term-funding scheme for small and medium-sized businesses, and lowered the countercyclical capital buffer for banks from 1% to 0% for at least the next 12 months. Governor Carney called the measures “a big package” that will “keep firms in business and people in jobs, and…prevent a temporary economic disruption from causing long-term harm.” The decision comes before the U.K. Treasury unveils its new budget expected to include a sizable fiscal response to the virus among broader spending increases.
ECB Expected to Follow Suit on Thursday: The U.K. FTSE 100 rose 0.2% following the emergency rate cut while longer U.K. yields actually moved higher, a likely reaction to expectations for greater funding needs for a larger fiscal budget. As the virus has continued to spread, expectations for additional policy actions has continued to grow. The ECB meets tomorrow and is expected to announce its own stimulus package. President Lagarde said Tuesday a joint fiscal and monetary effort is necessary or Europe could face “a scenario that will remind many of us of the 2008 Great Financial Crisis.” Italian yields fell sharply despite the country’s economic standstill on expectations for ECB action. While there continues to be uncertainty around the details of a U.S. fiscal response, a headline late Wednesday evening indicated the Treasury is likely to delay the April 15 tax filing deadline. Before this morning’s U.S. inflation data, S&P 500 futures were notably weaker, down 2.9%, and Treasury yields retreated after yesterday’s rise. The 2-year yield had declined 9.8 bps to 0.44% while the 10-year yield had dropped 10.3 bps to 0.70%.