The Market Today
President Cites 100k to 250k Deaths Possible as Fears Remain High
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook: Vining Sparks will be hosting our 2nd Quarter Economic Outlook Webinar next Tuesday, April 7. During this webinar, we will discuss the impact this Black Swan event is having on the economy and how it is shaping our expectations for growth and rates in the future. Attendees can earn up to 1 hour of CPE. To register for the webinar, please click here.
Forecast Revision: During the webinar, we will explain our most recent forecast revisions, now projecting the economy will lose between 15 and 20 million jobs over the next several months. We conclude that the economy will contract 7% in 1Q followed by a 14% decline in 2Q. These assumptions appear to be on the modest side of the range of outcomes.
Coronavirus Chartbooks (Updated by 9:00 a.m. CT)
PowerPoint: Coronavirus Chartbook (PWPT)
PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)
ADP Projects Small Job Loss in Early March, April’s Report Will Be the Key: The ADP Employment report projects the economy shed just 27k payrolls in March, not quite as bad as the projected loss of 150k jobs. The details are informative about how this virus will transmit through the real economic data. The most vulnerable to a shock in revenues/cashflow are small businesses (1-49 employees). Those companies lost 90k jobs. Medium-sized companies (50-499 employees) gained 7k jobs. Large employers (500+ employees) added 56k jobs. The construction sector was particularly weak, losing 17k jobs. Additionally, trade/transportation/utilities jobs dropped 37k while leisure and hospitality jobs fell 11k.
Key to this month’s payroll reports is that the observation period each month includes the 12th day of the month. For March, this is the week from March 9 to March 13, the week before the country began to respond with containment measures. In fact, the initial jobless claims report for the reference week showed just 282k new jobless claims (up from 211k, but still low versus historical standards). It was not until the next week that jobless claims spiked to 3.28 million, a new record-high by a multiple of four. As such, we are more concerned with the April payroll reports than the March report. For the month of April, we expect that the economy could have shed as much as 10 million jobs. For the second quarter, we currently anticipate job loss averaging 6 million per month. In relation to the size of the decline we expect, the March report becomes less of a concern. We have penciled in a drop of 70k for Friday’s nonfarm payroll report.
Mortgage Rates Drop Back to Lows, Refis Increase While Purchases Apps Drop to Lowest in 3 Years: Mortgage applications for the week ending March 27 rebounded 15.3% from the previous week’s decline. According to the MBS data, the 30-year mortgage rate dropped after a temporary spike, matching the lowest rate of the entire expansion at 3.47%. However, the details of the report show all of the increase in activity stemmed from a 25.5% increase in refis while purchase apps dropped 10.8% to their lowest level since 2016.
ISM Manufacturing, Auto Sales Data Expected to Show Impact: Later this morning, we will receive two key reports on economic activity. At 9:00 a.m. CT, the March ISM Manufacturing index is expected to drop to its weakest reading since the Great Recession. Incidentally, the previous PMI reports show that the coronavirus has hit the services sector even harder than the manufacturing sector. Throughout the day, March’s auto sales data will be released. Sales are expected to plunge from 16.8 to 12.0 million units (annualized). Also released today will be February’s Construction Spending report. However, given that it is February data, it will prove less informative.
Stocks and Yields Declined To Wrap Up Historic Month, Quarter: After an up and down day of trading Tuesday, equities sold off steadily in the final hour to bring a fitting end to a historically bad month and quarter. While there were plenty of virus-related headlines Tuesday, markets appeared impervious to any particular one. The S&P briefly recovered from an opening drop before sliding back in the afternoon to close down 1.6% and near its lows of the day. The index dropped 12.5% in March and 20.0% during the first quarter, both the worst respective showings since the final quarter of 2008. Longer Treasury yields spent the entire session below Monday’s final level with the 10-year yield ending down 5.7 bps at 0.67%. The 2-year yield initially fell but finished with an afternoon climb that lifted it 1.7 bps to 0.25%. Monday’s close at 0.23% was the lowest since May 2013. The 10-year yield dropped 48 bps in March and 125 bps for the quarter. After 150 bps of cuts to the fed funds rate in March, the 2-year yield slid 67 bps during the month. The 2-year yield tumbled 132 bps during the first quarter. After rocketing as much as 4.8% mid-month during peak risk-off shift, the Dollar ended up just 0.8% for March and 2.6% higher for the quarter. Under pressure from all angles, oil prices dropped 55% in March and 67% for the first quarter.
Tracking the Headlines: The virus remained the focus and there were both positive and negative developments. Overnight Sunday, official PMIs from China showed growth rebounded more than expected in March. For a second day, Italy reported one of its lowest levels of new cases in a couple of weeks. U.S. consumer confidence held up better than expected in March but likely doesn’t fully reflect the virus impact to the labor market (more below). Away from the official data, Southwest and JetBlue both reinforced capacity cuts in the months ahead and several states lengthened their respective lockdowns to match the national recommendations through April 30. As for the response, the Fed announced a repo facility for foreign central banks and monetary authorities and President Trump said a fourth phase of fiscal stimulus should total $2T and focus on infrastructure. In the afternoon press briefing, the White House’s top medical advisers encouraged citizens to not be discouraged when statistics deteriorate over the next few days and to continue following the CDC’s guidelines through April 30, because those strong measures are working. President Trump said following the guidelines is a “matter of life and death” and will make the next few weeks “rough,” but could expedite a bright light at the end of the tunnel.
White House Health Officials Offer Sobering Death Toll from COVID: Markets opened a new month and quarter with a similar sense of uncertainty and worry that drove world equities lower since mid-February and into a bear market. After wrapping up its worst month and quarter since 2008, futures pointed to sharp losses for the S&P 500 to start April. The White House over the weekend extended its “Slow the Spread” guidance for 30 days through the April 30. Health experts advising the administration on the outbreak said in yesterday’s evening press briefing those measures appeared to be working, but were still needed to keep downward pressure on the virus curves. Even with those stringent social restrictions, the officials said model-based predictions showed the domestic death toll could range from 100k to 200k, figures the President described as “sobering”. The projected death range was the focus of the early questions from reporters and quickly made its way into news headlines and around social media.
More Global PMIs Point to Widespread Economic Pain: At 7:10 a.m. CT before the ADP figures were released, futures contracts for the S&P 500 were down 3.5%. The losses mirrored similarly-sharp declines in Europe that had dragged the Stoxx 600 down 2.9%. Peripheral countries such as Italy (40.3, lowest since 2009) and Spain (45.7, lowest since 2013), those hardest hit by the virus, saw their manufacturing PMIs slump in March. The Eurozone’s March Manufacturing PMI was nudged down slightly in revision from 44.8 to 44.5. Asian equities were also broadly weaker and led by a 4.5% drop by Japan’s Nikkei 225. A gauge of activity at Japan’s largest manufacturers in the first quarter was better than expected but still posted its sharpest decline and weakest result since 2012. Manufacturing PMIs across most smaller ASEAN countries all slumped in March. The Caixin PMI, a private survey of manufacturing activity in China, jumped from 40.3 to 50.1 in March, echoing the expansionary signal from the government PMI survey released yesterday. After ADP projected 27k private jobs were lost in March, Treasury yields held overnight declines with the 2-year yield down 1.2 bps to 0.23% and the 10-year yield 6.8 bps lower at 0.60%.
Surprisingly Stable Consumer Confidence Likely to Yield To Weakness in Next Release: Consumer confidence held up much better than expected in March according to the Conference Board’s latest update, but responses did signal some worries of more turbulent times ahead. Overall consumer sentiment fell 12.6 points from a revised-up 132.6 in February to 120.0, the lowest level since the middle of 2017. The monthly decline was the largest since 2011 but roughly half of the deterioration economists expected. The surprising strength was the result of a relatively stable current assessment which drifted only 1.6 points lower to 167.7, a level consistent with solid readings over the last couple of years. The sanguine current assessment of the labor market, however, cannot reflect the full effect of a record surge in jobless claims during the week ended March 21. The Conference Board cuts off its first round of collections around the 18th of each month, leaving responses in the second half of the month to drive revisions alongside the next month’s release. Consumers weren’t completely oblivious to the risk, however, as the future assessment weakened nearly 20 points on a drop in expectations for job availability and income growth.