The Market Today

Phased Re-Openings Continue; Economy Contracts 4.8% in 1Q Estimate from BEA

by Craig Dismuke, Dudley Carter


Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT

Daily Confirmed Cases Decline: The number of new cases confirmed over the past 24 hours has ticked slightly higher than the previous day’s count, but continues to trend in a downward fashion overall.  There were 72,234 new cases reported globally and 24,114 reported in the U.S. (according to the Johns Hopkins CSSE data).  A growing concern globally is the increasing number of cases being confirmed in African and South/Central American nations.

Monitoring the Headlines: Global economic reopening remained a key focus Tuesday as France said it will open shops beginning May 11 as part of a more comprehensive plan and Spain noted it hopes to gradually lift most restrictions based on regional virus realities over an eight-week period. New York Governor Cuomo said some parts of his state should be able to satisfy the CDC’s guidelines for reopening by May 15 and California laid out a four-phase plan for resuming some economic activities in the coming weeks. Alabama indicated it would loosen some restrictions beginning Thursday. President Trump said the U.S. could be able to run 5 million tests each day “very soon.”

Fiscal and Politics: Despite continued concerns about a logjammed process, the White House said more than $52 billion in new PPP loans had been processed so far with the SBA indicating nearly $30 billion were from small lenders. In politics, House leadership announced it won’t return next week and Hillary Clinton endorsed Joe Biden for president.


Mortgage Applications Show Some Life in Purchase Activity: Mortgage applications pulled back 3.3% during the week ending April 24.  Refinance apps dropped 7.3%.  On a positive note, purchase applications actually increased 11.6%.  While the rebound was from a very low level, it is still positive to see signs of any activity in purchase applications.  The average 30-year mortgage rate ticked to a new record-low level of 3.43%.

Unreliable GDP Estimate Shows Economy Contracted 4.8% in 1Q: The U.S. economy contracted 4.8% in the first quarter in a report that its publishers note should be taken with a grain of salt.  The first estimate of GDP relies on many assumptions that were particularly difficult to control in this report.  According to the BEA, “The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.” They go on to describe some of the alternative data they used in their estimates, including “private high-frequency credit card transactions data to capture rapid shifts in consumer spending, unemployment claims data to identify late-period declines in business production and compensation, and information on the timing of state-mandated school closures that impacted government spending.”

Nonetheless, looking at the detail of the first estimate, the 4.8% contraction was driven by weakness in almost every category of expenditure/investment, with two notable exceptions.  Personal consumption dropped more sharply than expected, down 7.6%, the worst decline for consumer activity since 2Q80.  More specifically, the data showed the worst decline for consumer spending on services items on record.  Business investment fell 8.6%, exports dropped 8.7%, and imports pulled back 15.3%.  While the larger decline in imports actually helped the GDP tally, the overall level of activity is a more telling story.  On the positive side of the ledger, government spending increased and housing was, prior to the virus, on fire.  All three levels of government expenditures increased including a 0.8% gain in federal defense, a 3.1% increase in federal nondefense, and a 0.1% uptick in state and local.  The most notable positive, residential investment, housing, gained 21.0% in its best quarter since 2012. Unfortunately, as seen in the more timely housing data, that momentum was abruptly halted when people were told to remain at home. Going forward, while the 1Q contraction was remarkable in how sharp and abrupt it was, the report is likely to see significant revisions and the 2Q GDP tally is likely to make the 1Q report look mild.

Not Expecting Fireworks in FOMC Decision and Press Conference: The FOMC will conclude their meeting today at 1:00 p.m. CT with a policy decision followed by a 1:30 p.m. press conference for Fed Chairman Powell.  We do not expect any significant changes to policy today.  More likely are tweaks to the various liquidity facilities they’ve created.  Going forward, and perhaps beginning as early as today, we expect the first line of policy adjustment to be the refinement of their vaguely-worded forward guidance.  As of the March Statement, their policy guidance reads, “in determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”


Equities Gave Back Monday’s Gains as Crumbling Consumer Confidence, Corporate Earnings Weighed: U.S. equities gave up early gains after the Conference Board reported the largest-ever decline in consumer confidence for April. The major indexes initially added to a Monday rally following an overnight session that saw gains spread across Europe and most of Asia. Despite downbeat earnings reports from some major U.S. companies before markets opened, the S&P 500 opened up more than 1.4%. But the first tick would mark Tuesday’s peak, with the index quickly and completely erasing those gains following the dramatic drop in consumer confidence.

Treasury Yields Moved Lower with Stocks: Boeing tanked to add additional pressure on a report that prosecutors were launching a criminal probe into the company’s 737 Max issues. Health care shares led losses after Merck reduced its 2020 guidance pre-market and tech companies were the next worst performers with shares of Alphabet, Google’s parent company, dropping more than 3% before its earnings announcement. Gains in some cyclically-sensitive sectors, however, such as industrials and financials helped mitigate the overall decline to 0.5%. With equities backpedaling, Treasury yields gradually declined with the 2-year yield ending down 0.4 bps at 0.21% while the 10-year yield dropped 4.8 bps to 0.61%. U.S. WTI ended down just 3.4% after recovering sharply from a 21% overnight drop.

Tuesday’s After-Market Announcements: After the closing bell, Google recovered with a 3% jump after the company beat on revenues despite a notable slowdown in March advertising. Shares of Starbucks fell after the company reported a same-store sales decline roughly in line with expectations and said it expects activity in China to be as much as 25% lower despite almost all of its locations there reopening. Shares of Ford tanked in after-market trading as its current-quarter loss and outlook for the second quarter proved much worse than expected.

Equities Stabilize with Fed in Focus: Global equities were mixed but generally higher Wednesday with economic restarts and corporate earnings still in focus as investors awaited this morning’s U.S. GDP report and looked ahead to this afternoon’s Federal Reserve decision. U.S. equity futures recovered overnight as stocks mostly rose across Asia and held steady in Europe. Corporate earnings continued to roll in and were aiding the Nasdaq’s outperformance. Alphabet shares were up 8% early Wednesday after the company said March’s ad slump had not worsened in April and noted other business lines benefited from consumers working from home. Boeing lifted the Dow after its poor earnings results were better than feared. S&P 500 futures had gained 0.5% at 7:00 a.m. CT with Nasdaq contracts up 0.7%.

Global Yields Lower Ahead of U.S. GDP, Fed: Yields were lower across most of Europe and Treasury yields had declined ahead of the GDP release. Germany’s 10-year yield fell after another top economic confidence index for the Eurozone plunged by a record amount to its second-lowest level in history. Retail sales in Spain dropped a precipitous 14.3% in March, the largest monthly decline in data back to 1996. Italian yields diverged higher after Fitch downgraded the country’s credit rating to BBB-. Just ahead of the GDP release, the 2-year Treasury yield was 1.6 bps lower at 0.20% with the 10-year yield down 2.1 bps to 0.59%. Yields actually moved higher after the historic GDP contraction, spurred by a statement from Gilead that it “is aware of positive data emerging” from a U.S. trial study of its remdesivir drug to tread COVID.


Consumer Confidence Tumbled in April as Current Assessment Collapsed: Reflecting a similar trajectory to many global economic metrics, the Conference Board’s consumer confidence index spiraled 32 points lower in April, its sharpest decline on record to its lowest level since 2014. The index had dropped 13.8 points in March. April’s drop was driven by a collapse in the current assessment index which more than halved from 166.7 to 76.4 and offset a slight recovery in expectations. The expectations index rose 7 points after a 21.3-point pullback in March. Plans to buy a home or major appliances weakened again but were outpaced by more severe dives in plans to buy a vehicle or go on vacation.

Richmond Fed Lands on a List of Dreadful Fed Bank Activity Reports: The Richmond Fed’s manufacturing index plunged even more than the appalling expectations, the latest Fed Bank report to confirm the April Beige Book’s assessment that “activity contracted sharply and abruptly across all regions.” The headline index sank 55 points to -53, the largest decline on record to the lowest level in data back to 1993.

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