The Market Today
Persistence of Virus Continues to Weigh on Outlook, Markets
by Craig Dismuke, Dudley Carter
Monitoring the Headlines – Case Count: The number of new cases each day continues to increase globally while the number of cases in the U.S. has remained fairly steady, between 20k and 23k per day. However, there are regions of concern within the U.S. From an economic perspective, our focus remains on the potential economic damage from an accelerating outbreak. Part of this calculus includes determining which states or localities will implement or re-implement stay-at-home orders. We expect the bar to do so has been raised and it might require a local healthcare system to be overwhelmed before such dire economic steps are taken (e.g. the experience of the Lombardy region of Italy). Nonetheless, even if mass quarantines are not put in place, the impact on some meaningful percentage of peoples’ consumption habits is likely to persist. So long as it does, this will be one more headwind slowing the pace of the economic recovery.
Vining Sparks Economic and Interest Rate Projections, June Revision
New York Fed Report on Regional Manufacturing Activity Beats Expectations, Almost in Positive Territory: The Empire Fed Manufacturing index was expected to rebound from -48.5 to -29.6 in June, but beat expectations jumping to -0.2. While the headline index remains negative, albeit less negative than expected, there was improvement in every sub-index. The new orders index improved from -42.4 to -0.6 and the number of employees index inched up from -6.1 to -3.5. Moreover, the index is now within striking range of moving into positive territory.
Fedspeak: Dallas Fed Bank President Kaplan is scheduled to speak to the Money Marketeers at 10:00 a.m. CT and San Francisco Bank President Daly is scheduled to speak at 11:30 a.m.
Last Week’s Global Equity Sell-Off Lingers: Global equities are selling off Monday following notable declines last week sparked by discouraging economic projections from the Federal Reserve and the apparent resurgence of COVID-19 across multiple U.S. states (more below). In addition to the concerning developments in those U.S. states, which continued to be in focus over the weekend, a cluster of cases in Beijing has emerged in recent days. A top official from China’s capital city said, “The containment efforts have rapidly entered into a war-time mode.” While indiscriminate lockdowns of entire countries is believed to be a last resort in the face of a possible second wave, investors worry a pick-up of infections could stymie early signs of economic recovery. Data overnight showed activity in China improved in May, but at a slower pace than expected. Compared with a year ago, industrial production rose 4.4% (expected +5.0%), retail sales declined 2.8% (-2.3%), and investment was 6.3% lower (-6.0%).
Risk-Off Market Tone Continues to Pressure Yields Lower: Monday’s market fragility forced Asian equities 2.4% lower after last week’s 1.1% decline. Following a 5.7% pullback last week, Europe’s Stoxx 600, although well off its overnight lows of down 2.6%, remained 0.7% weaker around 7 a.m. CT. The continued pressure on equities was also reflected in weakness in oil prices, with U.S. WTI down 2.0% after the commodity slumped more than 8% last week. Before this morning’s regional manufacturing report from the New York Fed, U.S. equity futures, fresh off their steepest losses since mid-March, were down around 2%. At 7:25 a.m. CT, the 2-year Treasury yield had edged 1.4 bps lower while the 10-year yield had declined 4.4 bps, flattening the curve to near its lowest level since April.
ICYMI – June 12, 2020 Weekly Market Recap: U.S. equities sold off sharply last week and Treasury yields tumbled as worries about the economic outlook returned. Optimism about economies reopening combined with unprecedented stimulus efforts had pushed global equities steadily higher since late March. The positive momentum from May’s payroll report carried over last Monday, leading the Nasdaq to the first all-time high for a major index since February 19. However, despite more signs of some economic recovery – business and consumer confidence were both better than expected, purchase applications rose for an eighth week, and jobless claims slowed for a tenth week – sentiment quickly soured. Thursday’s equity plunge, following discouraging Fed projections on Wednesday, was the sharpest since March 16. Adding to the angst, a list of U.S. states began to see a rapid increase in the number of cases. The renewed worries about the durability of an early recovery ultimately knocked 4.8% off the S&P 500, its worst week since March 20, and dragged the 10-year yield 19.2 bps lower to 0.70%. Click here to view the full recap.