The Market Today
PMIs Tank; Washington Politics Prevent Economic Package
by Craig Dismuke, Dudley Carter
Total confirmed cases globally currently stand at 392,331, up 40,600 over the past 24 hours. This includes 46,450 cases in the U.S., up 11,209. Total confirmed deaths globally now exceed 17,150. On a positive note, Italy has now reported back-to-back days of declining cases for the first time since the outbreak gained traction in the country. We continue to watch for signs that will allow us to develop an expected curve, and this is an encouraging development.
To see the Coronavirus Chartbooks (Updated at 9:00 a.m. CT):
PowerPoint: Coronavirus Chartbook (PWPT)
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
PMIs Expected to Be Hammered: The Markit Services, Manufacturing, and Composite PMIs for March are all scheduled for 8:45 a.m. CT. The March PMIs are expected to plunge globally and in the U.S. Also released today is the February report on New Home Sales at 9:00 a.m. Sales are expected to pull back slightly but the more pressing issue will be how sales fare in March and April.
Fed Goes for Broke: Worries that partisan bickering could further delay the massive fiscal package investors believe is needed forthwith neutralized the positive impact of massive new stimulus announced by the Fed just ahead of the U.S. market open. Continued spread of the virus domestically led to more state and local governments over the weekend to order their citizens to remain indoors. Against that backdrop, which was consistent with global headlines, a failed cloture vote in the Senate on Sunday sent U.S. equity futures quickly to their lower allowable limits. However, sentiment briefly shifted sharply in a positive direction after the Fed announced that its quantitative easing program would now be unlimited and said it was adding several new programs to a lengthy list of now-active tools aimed at improving the flow of credit to businesses and households. The announcement sent S&P 500 futures from down 3.2% to up by more than 4% and added downward pressure to an overnight decline in Treasury yields. The 10-year yield hit its daily low just after the Fed’s announcement, falling as many as 16 bps to 0.69%.
Fiscal Stimulus Stuck on Capitol Hill, Frozen By Partisan Politics: Those moves, however, proved short-lived. While the Fed has now taken incredible steps to keep markets and economic participants liquid amid the virus shutdown, the massive fiscal stimulus package that investors are waiting for remained held up by partisan bickering. A second cloture vote in the Senate failed later in the day and a war of words between Democrats and Republicans played out in Bloomberg headlines and on social media feeds. Leaders of the two parties appeared at odds over how aid to businesses should be implemented and monitored. A separate bill from House Democrats only raised the odds of a longer delay. While Senate Democratic Leader Schumer said “we’re very close to reaching a deal,” Majority Leader McConnell said the delays meant a deal could be pushed to Friday.
Equities Fell, Yields Trimmed Their Gains As Investors Wait on Washington: The uncertainty led equities to quickly erase their post-Fed rise and kept them in negative territory for the remainder of the day. The Dow and S&P 500 both fell around 3% with nearly every sector lower on the day. Energy was the biggest drag despite oil prices recovering throughout the session while financials also fell more than 6%. After falling sharply on the prospects for unlimited bond purchases by the Fed, Treasury yields gradually moved higher as investors also contemplated an influx of long duration supply to fund the eventual tsunami of fiscal stimulus. After falling as low as 0.23%, the 2-year yield settled back nearly unchanged at 0.31%. The 10-year yield ultimately shed 5.9 bps to 0.79%, 10 bps above its session low.
Fiscal Progress, Italy in Focus: Optimism returned to global markets overnight to push the price of equities and oil up sharply and nudge the yields on Treasurys and other sovereign debts higher. The lack of a quick agreement in Congress to pass the phase three stimulus package which could reach $2T frustrated investors on Monday. However, there were signs late Monday night that Republicans and Democrats may have worked through their differences, providing hope the delayed deal is not dead. After a meeting with Treasury Secretary Mnuchin, Senate Minority Leader Schumer told reporters just before midnight, “We told [President Trump] we are very, very close to an agreement and he seemed very happy with that. And they all wanted to try get it done tomorrow.” In Europe, while it’s still early to call it a turn of the curve, official statistics from Italy show the number of new cases has edged down for a couple of days in a row. That has created a cautious optimism that Italy’s social lockdown may be starting to have an effect on the spread of the virus.
Data Shows Virus Devastation: But that lockdown, and others like it implemented in many nations and major cities around the globe, have also been economically devastating. Reinforcing why massive stimulus and support from world governments and central banks is necessary, multiple PMIs in key global economies plunged in March with exceptional weakness seen across the services sectors. Australia’s composite PMI slumped nearly 9 points to 40.7 in March, a record low. A top PMI for Japan cratered more than 11 points to 35.8, the lowest level since an earthquake and tsunami led to a nuclear disaster in early 2011. France’s composite PMI careened more than 20 points lower to 30.2, a record low. Germany’s dropped more than 13 points to 37.2, a low back to 2009. After PM Johnson announced a three-week lockdown yesterday of all non-essential activities, the U.K.’s composite PMI dropped nearly 16 points to 37.1 a record low.
Markets Leverage Hope for Risk-On Shift: The battle investors face in weighing the economic destruction, the significant debt-fueled stimulus governments are providing, and central banks pledging to do whatever it takes to keep liquidity moving has swung markets wildly in recent weeks. Hope was winning out Tuesday morning ahead of the U.S. session as S&P 500 futures were up more than 4% after being halted for trading, having hit the 5% upper limit. Europe’s Stoxx 600 was 4.5% higher and Asian markets earlier closed with even stronger gains near 5%. Oil prices were up roughly 3% on average and the Dollar ebbed on less fear. At 7:40 a.m. CT, the 2-year Treasury yield was 1.3 bps higher at 0.33% while the 10-year yield added 4.9 bps to 0.84%.
WSJ – Bond Downgrades Begin: A WSJ article this morning summarizes the ongoing downward revisions in credit ratings. According to the article, “Credit-ratings firms have issued a wave of downgrades for corporate and government bonds as they reassess the ability of borrowers to repay their obligations amid the coronavirus slowdown. The article continues, “Among the bonds facing potential downgrades are those tied to shopping malls, hotels, airlines, risky corporate borrowers and local governments.” As we’ve discussed in our recent quarterly outlooks, our biggest concern in credit is the buildup of BBB-rated debt and the risk that a credit cycle could result in a wave of downgrades to junk. This could create significant volatility and inefficiency in pricing.
Bloomberg – Mortgage Bonds Rattle Wall Street Anew: “The $16 trillion U.S. mortgage market — epicenter of the last global financial crisis — is suddenly experiencing its worst turmoil in more than a decade, … Unlike last time, risky mortgages aren’t the cause. Instead, the coronavirus pandemic is threatening to make good loans go bad — and simultaneously sapping the market’s funding. … Measures to slow the spread of the deadly disease are slamming the brakes on commerce, threatening to prevent companies from making payments on their leases and commercial mortgages. Companies are also firing employees, who won’t be able to keep up on their own rents and home loans. Mortgage industry veterans warn of a cascade of defaults. …At the same time, holders of mortgage-backed securities are fielding redemption requests from clients, margin calls from jittery counterparties and drops in their valuations, forcing the funds to solicit offers on billions in assets in emergency sales over the weekend. If such sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell their holdings too. … [R]eal estate investor Tom Barrack said Monday that the U.S. commercial-mortgage market is on the brink of collapse and predicted a ‘domino effect’ of consequences if banks and the government don’t take prompt action to keep borrowers from defaulting.”