The Market Today
Economic Data Collapse, Case Growth Slows Further, Debates Continue About Re-Opening States
by Craig Dismuke, Dudley Carter
There continues to be optimism about containment efforts as the number of confirmed cases globally continues to slow.
Coronavirus Chartbook (Click Here) – Updated by 9:30 a.m. CT
Purchase Applications for Homes Down 35% Despite Record-Low Mortgage Rates: Mortgage applications for the week ending April 10 rose 7.3% as refi apps rebounded 10.1% but purchase apps continued 1.8% lower. The 30-year mortgage rate, according to the MBA report, dropped 4 bps to 3.45% and marking a new low, now surpassing the lowest rates of 2012. Purchase applications have now fallen for five consecutive weeks, down 35%, portending a sizeable drop in housing transactions.
Retail Sales Drop but Core Spending Lifted by Prepping: Retail sales fell 8.7% in March on a 17.2% drop in gasoline sales and a 25.6% decline in auto sales. Ironically, excluding these two categories, core sales were actually good, although the product mix was much different. Building material sales rose 1.4% MoM and core retail sales rose 1.6%. As expected, it was prepping that drove sales higher. Food and beverage sales jumped 26% while online sales rose 3.1%. In contrast, clothing sales fell 51%, furniture sales dropped 27%, and restaurant sales fell 26%. Going forward, sales are likely to begin slowing even more sharply.
Empire Fed Index Lowest on Record: The New York Fed’s regional manufacturing index fell from -21.5 to -78.2 in April. This marks a new, record-low level and the degree of decline has become almost immaterial. Much more material will be how quickly the shutdown can be reversed in order to avoid more, longer-lasting economic damage.
More Data Likely to Show More Damage: The March industrial production report is scheduled for release at 8:15 a.m. CT and is expected to show a 4.1% drop in manufacturing activity. The April homebuilder confidence index is expected to drop sharply at 9:00 a.m. CT. The Federal Reserve will release their Beige Book report of anecdotal descriptions of regional economic conditions at 1:00 p.m.
Optimism Returned on More Signs the Virus is Slowing: Following Monday’s stumble, U.S. equities regained their positive momentum Tuesday as investors looked optimistically at more signs the virus spread could be slowing. The major indexes made their sharpest move up at 11 a.m. CT after Italy reported the fewest new cases in more than a month. Ahead of U.S. trading, Spain also reported a drop in new cases that resulted in the smallest number of new infections since March 20. Signs of a possible peak have sparked conversations across the continent about potentially relaxing some of the social restrictions implemented to mitigate the virus’s health impact. Italy is reportedly considering allowing some companies in certain sectors to resume operations nearer the end of April. Already, Austria and Spain have allowed some companies to turn the lights back on and Denmark plans to reopen day cares and elementary schools on Wednesday.
S&P 500 Reached Highest Level in Over a Month: Similar conversations have begun in the U.S. leading to disagreement on who holds the power to make the call. After saying Monday that he has the authority to reopen state economies, President Trump said Tuesday that he will make a decision “quickly.” His top economic adviser noted those “important announcements” could be made in the next few days. Several governors have countered the president’s claim, however, and believe only the states have the power to relax restrictions. New York Governor Cuomo said Tuesday he wouldn’t follow any federal call to loosen the lockdown if it threatened the health of his citizens. Still, signs of progress in U.S. hot spots have led states to begin planning for the reopen when the time is right. New York reported fewer hospitalizations, California’s governor said the state’s curve is flattening, and the governor from Illinois cited a deceleration of transmission. The S&P 500 finished the day up 3.1% and at its highest level since March 10. Treasury yields were less enthused, with the 2-year yield dropping 2.6 bps while the 10-year yield edged back 1.9 bps.
Desire to Reopen Grows With Evidence of Deep Contraction: The desire to restart some level of activity aims to limit the severe contraction already underway. Fed President Bullard estimated each day the nationwide restrictions remain in place costs the economy $25B in lost income, but that a V-shaped recovery is still a possible outcome. While White House adviser Kudlow said he believes the downturn will be a “brief, temporary contraction,” the IMF said it sees risks tilted to the downside as it revised its estimate for U.S. growth in 2020 down from +2.0% to -5.9%. Chicago Fed President Evans echoed that the downturn will be deep but noted he is hopeful for a recovery in the second half of the year. Turning to more tangible damage, JPMorgan and Wells Fargo both reported sizeable provisions to increase their allowance for loan losses because of the pandemic. Boeing announced that its customers had canceled a combined 150 aircraft orders for March and American Air said it was making further cuts to its flight schedule beyond May. Later in the afternoon, reports said the Treasury had reached an agreement with airlines on emergency aid.
Markets Whip Back Lower Wednesday, China Cuts Key Rate: The seesawing in global markets picked back up Wednesday as investors continue to balance expectations for abysmal economic data and corporate earnings with hopes for better days ahead when the virus slows and countries are able to go back to work. World equities are generally weaker following a broad recovery on Tuesday and U.S. WTI crude has moved back to 18-year lows despite a record production cut announced over the weekend. Stocks were mixed across Asia although more indexes fell than rose, including China’s CSI dipping 0.7%. The losses for Asian equities unfolded despite China’s central bank offering $14 billion through its medium-term lending facility at a reduced rate, actions that occurred alongside a previously-announced reduction in reserve requirements for certain banks taking effect. The policy changes come just ahead of Friday’s first look at China’s first quarter GDP which economists polled by Bloomberg believe will reflect a 6.0% contraction from a year ago.
Oil Prices Return to 2002 Lows: The sudden stop in global demand and travel has weighed heavily on oil prices, so much so that a record production cut announced by OPEC and others over the weekend has failed to prop up prices. The International Energy Administration (IEA) published a report saying demand in April could fall to its lowest level since 1995, a trend which may intensify and lead to storage capacity being maxed out by the middle of the year. The WSJ said in a report that those dynamics could theoretically lead to negative prices, or producers paying consumers to haul off excess inventory. Following Tuesday’s 10% drop, U.S. WTI slipped another 2.5% Wednesday to $19.61 per barrel, the lowest level since 1992.
More U.S. Banks Build Reserves With Halted Economy Expected to Increase Credit Losses: The virus’s impact is also expected to be clear in corporate earnings releases beginning this week. Citigroup and Bank of America joined JPMorgan and Wells Fargo in disclosing double-digit profit declines as they provided $7.03B and $4.76B for their respective loan loss allowances. Bank of America said it has received roughly 1 million requests to defer loan payments and sees evidence consumer spending is flattening out. Ahead of this morning’s related report on retail sales, the 2-year yield had edged 1.8 bps lower to 0.20% while the 10-year tumbled 7.0 bps to 0.68%. Following the clearly-affected retail update released at the same time as the record-worst Empire Manufacturing survey, the decline in equities and yields strengthened. Equity futures were down more than 2% at 7:36 a.m. CT and the 10-year yield fell to down 8.9 bps on the day.