The Market Today
Governments Debate as Virus Continues to Yield Mixed Headlines
by Craig Dismuke, Dudley Carter
Mixed News on Virus Growth: A small spike in the daily growth rate of confirmed cases over the past 24 hours adds to the level of concern this morning. Total cases excluding China rose 6.8%, above the 3-day average growth rate of 6.1%. The increase came from more cases in France, Germany, Iran, and others. On a positive note, the daily growth rate in Italy fell from 2.8% to 2.3% while the growth rate in New York dropped from 7.1% to 6.5%. Italy is very close to the 2% growth rate which would result in a drop in outstanding cases presuming a 14-day infection period.
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Housing Facing Several Challenges, Applications for Home Purchases Fall to Lowest Since 2015: New mortgage applications to buy homes fell to their lowest weekly level since 2015 according to the MBA report for the week ending April 3. Applications fell 17.9% on a 12.2% drop in purchase apps and a 19.4% drop in refi apps. Mortgage applications and the associated activities are facing multiple challenges now: a loss of employment/income, buyers unable to look at new homes, and mortgage rates that have not fallen with Treasury yields. At the end of 2019, the 30-year mortgage rate stood at 3.95%, 203 bps over the 10-year Treasury yield. Today, the 30-year mortgage rate is quoted in the MBA report at 3.49%, 274 bps over the 10-year Treasury yield which has dropped to 0.75%.
FOMC Minutes to Give Insight into Deliberations at Emergency Meeting: from At 1:00 p.m. CT, the Fed will release the Minutes from their second emergency meeting in as many weeks (March 15), at which they cut rates to 0.00-0.25% and reinstituted $700 billion of quantitative easing (in its traditional form). Also talking today at 10:00 a.m. CT on a virtual discussion with the Chicago Economics Club is Chicago Fed Bank President Charles Evans.
U.S. Stocks Initially Joined Global Rally Spurred By Hopes of Slowing Infections: U.S. equities surged at the open following a strong global rally overnight but had nothing to show for the early efforts by the time markets closed. Signs in recent days that the virus could be leveling off in key global hot spots had lifted spirits this week, sparking a 7% rally for U.S. stocks on Monday that carried over into Tuesday’s global session. Stocks in Asia had earlier gained 2.3% and Europe’s Stoxx 600 closed with a 1.9% improvement. The global risk rally had pushed Treasury yields notably higher and given oil a boost ahead of a meeting later in the week that investors hope will lead to OPEC+ cutting back production. Medical experts had earlier warned that this week could see the most tragic death counts yet but may also include signs of a slowing rate of new infections. Consistent with those comments, both New Jersey and New York reported their deadliest days yet of the outbreak while Governor Cuomo reported a third day of fewer cases in New York. Italy, France, and Spain also reported fewer new cases on Tuesday.
Momentum Ultimately Faded: Nonetheless, markets rolled over around noon CT and the positive early momentum slowly and steadily faded in the second half of trading. There remains a lot of uncertainty around the ultimate outcome of the virus and how successful the economic recovery will be once stay-at-home orders are gradually relaxed. White House Adviser Kudlow said he hoped the economy could be reopened in the next four to eight weeks. That is expected to be a major theme of corporate earnings calls in the days and weeks ahead as global companies release 1Q results and discuss their plans for the future. The second quarter earnings seasons kicks off in earnest next week with names such as Delta, Johnson & Johnson, Abbott Laboratories, and the largest U.S. banks. Investors and policymakers are also focused on the health of smaller businesses around the country with less capital room to absorb the blow to business from the virus. Treasury Secretary said he was working with Congress on $250B in additional funds for the Paycheck Protection Program, which was initially allocated roughly $350B in the phase three CARES Act. By the close, the S&P 500 had declined 0.2% after jumping 3.5% out of the gate while the Dow had erased a 4.1% jump to close 0.1% lower. For both indexes, it was the largest gain erased since October 2008; since 1927 the Dow has only made such a move one other time while the S&P has seen similar reversals in just three other sessions. The 2-year Treasury yield inched down 0.2 bps to 0.26% after rising 3.7 bps earlier, while the 10-year yield added 4.2 bps to 0.71% after jumping as much as 11.2 bps around lunch.
Mixed Global Session as Wuhan Reopens: An up-and-down start to the week has given way to mixed global trading on Wednesday as investors continue to watch for more signs that the virus could be slowing down in the major infection hot spots around the world. While deaths have tragically reached their worst daily levels in some of those areas, trends in new case rates appear to have turned lower, spurring some buying of risk assets early this week and sparking debate about plans to possibly reopen the economy in the weeks ahead. While those discussions are preliminary in most places, the city of Wuhan in the Hubei province of China, the epicenter of the global outbreak and home to more than 11 million Chinese, lifted local travel restrictions starting today more than two months after those measures were put in place in late January. Chinese equities fell 0.5%, however, in a generally downbeat day across.
EU Finance Leaders Fail to Reach Joint Funding Agreement: The earliest and hardest hit regions in Europe have shown some positive signs this week that new cases may be past their peak. Other regions, however, continue to battle the disease and all of the major economies remain under lockdown. Considering the different points at which these countries find themselves on the virus curve, the discussions around easing restrictions is in very different phases. An Italian newspaper reported earlier this week officials could start to loosen isolation measures in early May, while Chancellor Merkel has recently said it’s much too soon to be talking about reopening Germany. European stocks were earlier down around 1% while yields in the region actually moved higher. Finance Ministers from the EU have been seeking a consensus on a joint financial response to the country that could provide 500B euros of emergency funds, but ended a marathon meeting on Thursday with no agreement. The debate on when the U.S. could reopen is heating up, although the CDC has recommended physical distancing across the country at least through the end of April. U.S. equity futures struggled for direction overnight but had risen 1.3% around 7:30 a.m. CT to near their best levels of the day. The 2-year Treasury yield was 2.0 bps higher at 0.28% while the 10-year yield rose 4.6 bps to 0.76%.