The Market Today
Mixed U.S. Data Continues; New Outbreak in Beijing
by Craig Dismuke, Dudley Carter
Tracking Cases: There were 144,138 newly confirmed cases of coronavirus yesterday , the second-highest single-day total. New cases in the U.S. remain in the 20k-23k range. From a health perspective, the biggest concern is now the growth in Brazil, which saw 34,918 new cases yesterday marking the second-highest one-day tally from any country, only surpassed by April 24 results from the U.S. (36,188). There is also concern about growth in India, Russia, Pakistan, and others. In the U.S., the number of deaths reported each day has continued to decline even as new cases have been reported. Based on this, it appears that the steady case growth is reflective of increased testing turning up positive results which otherwise might not have been identified, and that the transmission rate might be slowing a bit. Time will tell, but this would be a positive development (see Chart of the Day).
Monitoring the Headlines on Reopening: Rising new cases in some states became a concern last week and remained in focus on Tuesday. New cases in Florida and Texas both rose by more than their seven-day average and Texas reported the largest jump in hospitalizations in two weeks. Texas’s governor said the increase in cases was likely the result of a lack of social distancing and said the state still had abundant hospital capacity. Florida’s governor partly attributed the rise in cases to testing more in “high-risk environments” and said “we’re not rolling back” the easing of restrictions. He said his state’s hospital capacity was “not even close to being maxed out.” Nevada, which has also seen new cases increase, is not ready to move to the next phase, the governor said. Vice President Pence said the CDC was deploying more personnel to areas which have seen a recent uptick in infections.
Mortgage Rates Drop to Record-Low: Mortgage applications for the week ending June 12 rose 8.0% on a 10.3% increase in refi apps and a 3.5% increase in purchase apps. Purchase apps are now up 77% over the past nine weeks portending a strong recovery for the housing market. Mortgage rates fell 8 bps to 3.30% (30-year fixed) during the reference week, the lowest level on record.
Housing Starts and Building Permits Inch Higher but Long Way to Go: Despite all of the positive indicators for housing activity, actual housing starts were quite disappointing in May, rebounding just 4.3% after falling 44% since January. More encouragingly, new building permits increased 14.4% in May. However, permits remain 21% below their pre-corona peak.
Fedspeak: Fed Chair Powell will deliver his second day of testimony today to Congress, this time before the House Financial Services Committee. It is unlikely that he makes new headlines today. Also on the calendar is Cleveland Bank President Mester at 3:00 p.m. CT.
Risk Rallied Again as Powell Keeps Consistent Messaging from Last Week’s Remarks: Fed Chair Powell told members of the Senate’s Banking Committee that, “Until the public is confident that the disease is contained, a full recovery is unlikely.” However, for a third consecutive session, investors chose to be optimistic about prospects for economic recuperation. Reports of a new virus cluster in Beijing added to concerns about rising infections in some U.S. states and rattled markets to start the week. However, global equities had surged overnight following Monday’s rally on Wall Street after the Fed announced it planned to begin buying individual corporate bonds. News that the White House was considering a $1 trillion infrastructure package compounded the risk-on trend, which found another gear after the surprisingly-strong retail sales report.
Beijing Developments Briefly Knocked Markets: The cheer, however, was briefly interrupted Tuesday after a headline said Beijing was raising its emergency response to level two amid the new coronavirus outbreak. The decision by Beijing officials to close schools and test citizens before they leave the city followed reports that the number of new cases had crossed above 100 and some infections were identified in a couple of provinces outside of Beijing. In a matter of minutes, the S&P 500 slumped more than 2% from its highs and the 10-year yield fell nearly 6 bps, both almost fully unwinding their respective daily increase. By the close, however, nerves had calmed and the S&P 500 had recovered to notch a 1.9% gain. Bond yields also rose, but recovered less than equities. The 2-year yield ended up 1.0 bps at 0.20% while the 10-year yield added 3.1 bps to 0.75%.
Risks Abound But Investors Remain Optimistic: While risks abound, equity markets around the world remained upbeat Wednesday following another day of gains on Wall Street. Since the weekend, a cluster of new infections has appeared in Beijing, some U.S. states have seen new cases accelerate, top economists have continued to warn of slow recovery, and tensions between China and India and between North and South Korea have risen. Yet yesterday’s boost to sentiment from hints of U.S. infrastructure spending and a strong jump in retail sales remained in place on Wednesday.
Treasury Yields Little Changed After Consecutive Increases: Stocks inched higher in Asia and were up 0.9% across Europe at 7:30 a.m. CT, while U.S. futures rose more than 0.5%. Treasury yields were lower for most of the Asian session but had recovered back near unchanged as European yields rose. Germany auctioned off the largest amount of 10-year Bunds since 2014 as it seeks to support its economy through the pandemic. After this morning’s housing data, the Treasury curve was essentially unchanged for the day.
Industrial Recovery Fails to Mirror Retail Sales Rapid Rebound: Industrial production stood in contrast to an earlier report on retail sales, with April’s decline even more severe than previously estimated and May’s recovery more timid than expected. After declining 12.5% in April, down from an initially-estimated 11.2% drop, industrial output rose 1.4% in May, less buoyant than the 3.0% gain economists had expected, despite declines in both utilities and mining. The manufacturing component rose 3.8%, short of the forecasted 5.0% rebound, after tumbling 15.5%, more than the 13.7% previously estimated. Reflecting the modesty of May’s recovery, manufacturing output remained 17% lower than in February.
Recovery in Builder Confidence Continues: Home builder confidence continued to recover in June and by more than expected. The current month’s 21-point gain combined with May’s 7-point improvement to push the headline index to 58, marking a recovery of two thirds of April’s 42-point plunge. Mortgage purchase applications have been on a hot streak recently as mortgage rates declined to record lows. June’s recovery in builder confidence was the result of an index tracking prospective buyer traffic more than doubling from May as sales expectations staged a roughly 50% recovery. The NAHB’s chief economist said of the June results, “Builders report increasing demand for families seeking single-family homes in…lower density neighborhoods. At the same time, elevated unemployment and the risk of new, local virus outbreaks remain a risk to the housing market.”
Top Fed Brass Bet on Long Recovery: Fed Chair Powell’s testimony before the Senate’s Banking Committee was relatively uneventful, offering a message consistent with his press conference comments following last week’s meeting. He again stressed the severity of the downturn, acknowledged the uneven impact across various demographics, gave a nod to some signs of economic recovery but placed a greater focus on the long and uncertain road ahead, indicated Congress may need to do more, and pledged that the Fed would use its full range of tools until recovery is well under way. In a separate appearance, Vice Chair Clarida echoed Powell’s sentiment, saying, “some other indicators suggest a stabilization or even a modest rebound in some segments of the economy, …But activity in many parts of the economy has yet to pick up, and GDP is falling deeply below its recent peak.”