The Market Today
Optimism About Treatment Drug; Fed and ECB Prepared to Do More if Needed
by Craig Dismuke, Dudley Carter
Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT
Monitoring the Headlines
Another Remdesivir Report Got Markets Moving: A U.S. GDP contraction and Federal Reserve decision were expected to drive Wednesday’s new cycle. But a statement from Gilead on positive effects of remdesivir stole the headlines. Dr. Fauci, a top White House medical adviser, said the trial across several countries indicates the drug can “block this virus” and shorten recoveries. The National Institute of Health said it “accelerates” patient recoveries. Also medically related, the White House is reportedly working on a Manhattan Project of sorts named “Operation Warp Speed” to produce 100 million doses of a vaccine by the end of the year.
White House on the Economy: White House adviser Kudlow said he expects the ongoing economic contraction will be “significantly worse” in the second quarter but believes a big snapback will take place in the second half of the year. President Trump called the third quarter a “transition quarter” to a “fantastic” fourth quarter and 2021. Treasury’s Mnuchin also expects a rebound but said he would consider more relief it the economy doesn’t pick up.
Reopening News: Japan will extend national restrictions while Switzerland will allow restaurants to reopen on May 11. Jaguar Land Rover has restarted 75% of production in China and Toyota will reopen U.S. factories May 11. New Jersey will reopen parks and golf courses and Florida, excluding Miami-Dade, Broward, and Palm Beach, will take its first step May 4. San Francisco extended its stay-at-home order through May but will allow some outdoor businesses and construction to resume.
MONETRAY POLICY DECISIONS
FOMC – Pledges Use of Entire Toolkit, Sees “Considerable” Medium-Term Risk: The FOMC voted unanimously to leave rates unchanged, having already cut their target rate range 150 basis points in two unscheduled meetings in March. The Official Statement began with a pledge to use “its full range of tools to support the U.S. economy in this challenging time,” before moving on to vividly describe the indiscriminate impact the virus and its containment measures are having. Looking forward, the Fed noted “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” The FOMC chose not to refine their forward guidance, continuing to say officials expect “to maintain this target range until it is confident that the economy has weathered recent events and is on track.”
Tone Didn’t Brighten During Powell’s Press Conference: Fed Chair Powell acknowledged that “many standard economic statistics” don’t yet reflect the “abrupt halt” that has been brought about by “forceful measures” taken to slow the virus, but said “it is clear” the economic effects are “severe” and the drop in the second quarter will be “unprecedented.” He said, “it will take some time…for us to get back to anything that resembles maximum employment,” stressing the outlook is “extraordinarily uncertain” and dependent on the unknown path of the virus. Powell did give some hint as to the Fed’s general policy outlook, saying rates at zero is “the right place to be” and noting they will “not be in any hurry to withdraw these measures, or to liftoff. We’re going to wait until we’re quite confident that the economy is well on the road to recovery.” Addressing the emergency liquidity facilities, “if demand for our facilities is greater than we’ve estimated, then we’ll expand them.” He noted the Fed “won’t run out of money” and said “we’re a long way” from exhausting Treasury’s equity.
ECB – Opts for Lending Facilities Over Rate Cuts or More QE: The ECB chose to leave its key policy rates and asset purchase programs unchanged on Thursday, opting instead to enhance its accommodative position by reducing rates on a current bank lending programs and establishing new operations to support market liquidity. The ECB lowered the rate on its existing TLTRO III lending program deeper into negative territory, potentially as low as -1.00%, so that banks will be paid even more to borrow in hopes they will lend those funds out into the economy. The central bank also announced a new lending program (PELTRO) to support liquidity and market functioning that also carries a negative rate. While officials didn’t alter the emergency asset purchase program limits as some had suspected they might, they did note they are “fully prepared to increase the size…by as much as necessary and for as long as needed.” Early in her press conference, President Lagarde cautiously described the dire and unprecedented contraction that has led to intense destruction of the labor market and could cause the economy to shrink as much as 12% in 2020, and 15% in 2Q.
Another 3.8 Million File for Unemployment: Another 3.84 million people filed for unemployment benefits during the week ending April 25. The number of new filers has now declined for four consecutive weeks after the initial spike. However, the total number of people filing over the last six weeks is now 30.3 million, equivalent to 20% of the total payrolls pre-virus. Based on this total, the unemployment rate could now be expected to rise as high as 20.7%.
Income Falls 2.0% While Spending Falls 7.5% in March: Personal income fell 2.0% in March while spending dropped 7.5%, according to data released by the BEA this morning. The decline in spending was the largest monthly decline in records dating back to 1959. However, like yesterday’s GDP report, this morning’s report likely lacks precision. According to a note issued by the BEA, “The full economic effects of the COVID-19 pandemic cannot be quantified in the Personal Income and Outlays estimate for March 2020 because the impacts are generally embedded in source data and cannot be separately identified.”
Inflation Data to Take a Back Seat for Now: Core PCE inflation fell 0.1% MoM in March bringing the year-over-year rate down from 1.8% to 1.7%. While this is the Fed’s preferred measure to track, it lacks relevance in the middle of what may prove to be the sharpest economic contraction in U.S. history. Eventually, it will return to focus, but for now it will remain on the backburner unless it begins to show signs of deflation.
Remdesivir Report Overshadowed GDP and the Fed: Markets brushed aside the sharper-than-expected 4.8% first-quarter contraction and afternoon Fed decision confirming officials are in no hurry to pull their monetary policy support. Instead, investors were focused on developments around a possible treatment for the coronavirus. Stocks rallied sharply with oil after Gilead issued an early-morning statement saying “it is aware of positive data emerging” from a remdesivir trial to treat the coronavirus. Just before lunch, Dr. Fauci confirmed the data show “clear cut” positive effects from the drug. By the close, the S&P 500 had gained 2.6% and U.S. WTI for June delivery jumped 22% to $15.06 per barrel. Treasury yields were more cautious amid the headlines but inched higher after the Fed’s decision. The 2-year yield dropped 1.0 bps to 0.20% while the 10-year yield settled up 1.4 bps at 0.63%.
Asia Rises on Remdesivir as China’s Restart Slows in April: The hopeful impact of positive results for remdesivir in treating COVID lifted stocks in Asia while investors’ focus on economic data and central bank decisions shifted from the U.S. to both Asia and Europe. Early in the session, the official services PMI for April in China perked up again but two separate manufacturing PMIs pointed to a slowdown after recovering in March, with one slipping back into contraction at 49.4. While China is attempting to resume activities with the domestic virus outbreak reportedly tamped down, much of the world remains locked down which has cratered global demand.
Europe’s Economic Contraction Confirmed Before ECB Decision: Europe’s economic destruction was clear in data released Thursday showing record first-quarter contractions in France (5.8%) and Spain (5.2%), a record spike in German unemployment from 5.0% to 5.8%, and a record 3.8% decline in Eurozone-wide GDP. Those data came just before the ECB announced it was holding rates and asset-purchase limits steady, but making other policy adjustments to support the economy. Reflecting initial disappointment, European equities fell and yields rose after the announcement before recovering during the early portion of the press conference. Ahead of this morning’s spate of U.S. data, S&P 500 futures were down 0.6%, the 2-year yield was 1.4 bps lower, and the 10-year yield had dipped 1.8 bps, moves which mostly held after the reports were released.
Pending Home Sales Plunge Highlights Abrupt Shutdown of Hot Housing Market: Pending home sales plummeted a larger-than-expected 20.8% in March from February’s three-year high according to data from the National Association of Realtors, reflecting a swift reversal from a brisk start to 2020. Earlier in the day, the 21% jump in housing investment, the strongest since 2012, was a rare bright spot in the first quarter GDP report. The March decline in pending sales (contract signings for existing home sales) was the worst since 2010 and widespread across the country, signaling a commensurate collapse of existing home sales ahead.