The Market Today

Economy Contracts 33% in Historic Collapse

by Craig Dismuke, Dudley Carter


VS Coronavirus Chartbook (PDF) (Link) (Updated at 9:00 a.m. CT)

Monitoring the Virus Headlines: While cases have shown signs of plateauing in the U.S., the number of fatalities has ticked higher (although the overall fatality rate has yet to tick higher). Florida and California both reported a slower pace of case growth but joined Texas in reported a new record for daily deaths. Nationally, total fatalities in the U.S. crossed above 150,000. Consistent with concerns that the economy had slowed in response to the rise in infections since June, governors from Illinois and New Jersey both announced they would pause plans for any further reopening of their states.

Monitoring the Headlines on Stimulus: During his press conference Fed Chair Powell stressed that “fiscal policy is essential here” and “can address things that we can’t address,” adding that “Congress [is] now negotiating over a new package and I think that’s a good thing.” At the same time he was speaking from Washington, Congress remained locked in contentious negotiations around the next aid bill. Several Republican Senators continued to indicate parties are “far apart” on details of an appropriate plan, a message echoed by Treasury Secretary Mnuchin. Mnuchin said the White House and Democrats were far apart in relief talks while also admitting that he and Senate Majority Leader McConnell were also still at odds on how to address several issues.


Historic Contraction for U.S. Economy, Down 33% in 2Q: After contracting 5.0% in 1Q, the U.S. economy contracted the most on record in 2Q, down 32.9% QoQ, SAAR (-$1.8T). Driving the decline was a 34.6% QoQ, SAAR ($1.3 trillion) decline in personal consumption as consumers were required to avoid certain economic activities. Business investment shrank 27.0% (-$207B) while residential investment contracted 38.7% (-$73.5B).  As the supply chain was disrupted, inventories dropped a staggering $315.5 billion, dragging another 4.8% from the final GDP tally.  There were two positive contributions to growth.  Government spending increased 2.7% ($22B) and the external trade deficit shrunk $7.3 billion, albeit in a large decline in overall trade volume.  The increase in government spending came from the federal level as state and local spending contracted 5.6% (-$29.3B). Going forward, 2Q contained the peak of the economic impact from the virus.  The question will now turn to how quickly that lost activity can be made up.

Continuing Claims Show Long Road Ahead for the Labor Market: The latest jobless claims were disappointing as initial claims rose for a second week in a row while continuing claims jumped by more than expected. Initial jobless claims rose from 1.422MM to 1.434MM in the week ended July 25, slightly less than economists expected. The increase in new claims marked the second weekly increase in a row and since the pandemic began to impact the labor market in March. Worth nothing, non-seasonally-adjusted new claims actually declined, diverging with the adjusted figures for a second week in a row; combined, unadjusted claims are down more than 300k over the last two weeks in which seasonally adjusted claims have risen by 126k. The bigger disappointment were continuing claims for the week of July 18 which rose 867k from 16.15MM to 17.01MM. Those claims, seen as the cumulative and ongoing level of unemployment, show the long road ahead for economic recovery. Away from the regular state programs, initial filings for unemployment insurance through the Pandemic Unemployment Assistance Program (PUA) fell from 936k to 830K while continuing claims under that program for the week of July 11 dropped from 13.2MM to 12.4MM.

Corporate Earnings: After the market close, Amazon, Google, Facebook, and Twitter will all report earnings.


Cautious Fed Lifted Equities and Nudged Yields Lower: U.S. equities rose into and out of the Fed’s decision, as officials reiterated their pledge to keep policy accommodative until they’re confident of sustainable recovery and Fed Chair Powell kept the door open for more action as data shows rising infections are starting to weigh on economic activity (more below). The S&P 500 regained positive momentum into the close to end 1.2% higher with all 11 sectors making positive contributions. With the Fed ready to keep rates low for the foreseeable future, Treasury yields inched lower after the decision with the 2-year through 7-year parts of the Treasury curve closing at new all-time lows. The 2-year yield dipped 0.8 bps to 0.13%, the 5-year yield ticked 1.3 bps lower to 0.25%, and the 7-year yield edged down 0.7 bps to 0.43%. The 10-year yield drifted 0.5 bps lower to 0.57%. The Dollar fell nearly 0.5% after the dovish decision to a new low back to May 2018, helping propel Gold to a new all-time high.


Global Markets Retreat as Positive Fed Effect Fades: The positive market impact from the Fed pledging its steadfast support for the economy dissipated quickly overnight as global stocks retreated and investors awaited the long-anticipated first look at U.S. 2Q GDP and key earnings from tech names after the market close. Separate story lines appeared to be driving individual markets while the overarching theme remained the heightened economic uncertainty. Stocks fell in Japan after a report indicated restrictions could be tightened in response to a rise in new infections. Stocks in Singapore were the biggest losers on the continent as bank stocks sold off on news the government was capping dividends.

Treasury Yields Touch New Record Lows: The market tone deteriorated further in Europe in what analysts say is the busiest day of the quarter for corporate earnings. Every major national index was down more than 1%, while several, including Germany’s DAX, slid more than 2%. Priming the pump ahead of this morning’s U.S. data, Europe’s largest economy reported a sharper-than-expected 10.1% contraction in 2Q as the virus hammered activity. The dour mood dragged European yields lower, with Germany’s 10-year yield leading with a 4.4-bps drop to -0.55%, a two-and-a-half month low. Before the GDP report and jobless claims data, U.S. stock futures were down just under 0.9% and Treasury yields added to yesterday’s declines. After the morning’s data, the 10-year yield fell 3.4 bps to 0.54%, joining shorter maturities at new all-time lows.


Fed Kept Its Dovish Tone, Flexibility for Further Action: The FOMC voted unanimously to leave monetary policy unchanged and said asset purchases will continue at the current pace. The Official Statement was changed to note that “economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.” A sentence was added to say that “the path of the economy will depend significantly on the course of the virus,” an explicit but open-ended linkage that provides officials with some policy latitude at upcoming meetings. Except for the surprise announcement that a task force has been created to manage the national coin shortage, Fed Chair Powell’s post-meeting press conference was uneventful and an apparent effort to buy time and flexibility for officials to observe how the virus and economic outlook evolve over the coming weeks.

Powell Stressed Caution as Virus Resurgence Shows Signs of Weighing on the Recovery: Echoing the Statement, Powell acknowledged some improvement in the data but spent a considerable amount of time and effort stressing the Statement’s binding of the outlook to the unknowable path of the virus. Going further, he said that alternative high-frequency data has pointed to some slowing in the pace of recovery as the virus picked up in mid-June. He again followed up this cautious assessment by stressing that policymakers, particularly Congress, will need to provide further support. Of interest, he gave no indication of what the outcome of the Fed’s framework review will be, other than to say he expects the process to be concluded soon. Considering the already-slowing pace of recovery and pernicious persistence of the virus, we expect the Fed will find it appropriate to ease further in September, either through altering their asset purchases, strengthening their forward guidance, or both.

Pending Home Sales Popped in June: Pending home sales recovered further in June after roaring back in May following two months of steep declines as nationwide stay-at-home orders briefly shut down the housing market. June’s 16.6% gain beat expectations and combined with a record 44.3% surge in May to push the pending sales index to a new high for the cycle. New contract signings contracted more than 20% in both March and April as government officials told Americans to stay at home to slow the spread of the virus. While three regions saw the pace of activity moderate in June, all four posted another double-digit gain. Supported by mortgage rates drifting to record lows, the increase in new contracts portends another pop for existing home sales closed in July.

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