The Market Today
Sentiment Remains Optimistic but Next Ten Days to Be Key
by Craig Dismuke, Dudley Carter
Vining Sparks Coronavirus Chartbook (PDF) (Link) (Under Construction, New chartbook to be released by 5:00 p.m. CT)
Monitoring the Headlines
Sentiment Continues to Improve: Despite still-ugly economic reports, sentiment has shifted recently to a more positive position as lockdowns have been lifted and signs of possible progress on the medical front have appeared. This positive evolution continued over the weekend. Since Friday, Japan fully ended its state of emergency, Spain said it would allow tourism to re-open in July, and a German news outlet reported the country would lift travel warnings for all 27 EU countries and several others in the region in mid-June. On Monday, Novavax grabbed headlines with an announcement that it had started a human trial of its vaccine candidate with a first round of results likely available in July.
Key Ten Days Ahead: Going forward, the number of new cases over the next seven to ten days is likely to set the tone through, at least, the fall. Many states have now had been re-opened for two weeks. More and more of the social distancing restrictions have been loosened. Individuals have become exasperated with the lockdowns and have begun to resume activity. And most acutely, the Memorial Day holiday saw a significant resumption of activity for some areas. If the number of new cases does not increase over the next several days, this will likely embolden leaders to re-open their economies even more quickly. The opposite would likely result in an economically expensive setback.
Chicago Fed Index Shows Depths of Economic Malaise: Today’s economic calendar is busy. The Chicago Fed’s National Activity Index for the month of April declined from -4.97 to -16.74, an unimaginable reading from an index we tend to track in tenths of a point (see Chart of the Day). During the heart of the financial crisis, the index dropped to -3.35. As an aggregation of 85 difference indicators covering a broad range of economic activity, the depth of the decline makes apparent what is already known: it is ugly.
Housing Data and Consumer Confidence: Also released this morning, the March home price report from FHFA showed prices rose just 0.1% MoM while the S&P CoreLogic report showed them increase 0.47% MoM. More important will be the later data, consumer confidence (Conference Board) for the month of May and new home sales for the month of April, both scheduled for 9:00 a.m. CT. The Dallas Fed will release its regional manufacturing activity report at 9:30 a.m.
Stocks, Yields Move Up as Last Week’s Optimism Remains Intact: Historic economic destruction will make for a long recovery and combine with continued virus uncertainty and the return of U.S.-China tensions to maintain a heightened risk of market volatility. For today, however, equities remained focused on the positive developments related to re-openings and vaccines, as discussed above. Stocks gained more than 1.9% across Asia and 0.8% in Europe. At 7 a.m. CT, U.S. index futures were up around 2% at levels last seen in early March. Reflecting the day’s dynamics, hotels and airlines were among the top performers. In other markets, gold inched lower and oil gained. Interest rates rose in developed nations and inched lower for those with more questionable credit profiles. Germany’s 10-year yield rose 5.3 bps while Italy’s edged back 0.4 bps. At 7:20 a.m. CT, the 2-year Treasury yield was 1.6 bps higher at 0.19% while the 10-year yield had added 3.3 bps to 0.69%.
ICYMI – May 22, 2020 Weekly Market Recap: U.S. equities recovered last week as economies continued to re-open and on hopes of a possible vaccine potentially sooner than expected. The sharpest gain occurred Monday on a report that Moderna’s experimental vaccine had positive effects in a phase one trial. The excitement was tamped down Tuesday by a report questioning the findings, but re-energized Friday after Dr. Fauci said the results were “really quite promising.” The optimism, however, was capped by escalating tensions between the U.S. and China. Built most recently on the U.S.’s frustration with China’s handling of the virus, the frictions occurred on multiple fronts, including the U.S. congratulating Taiwan’s President and China launching legislation seen as tightening its grip on Hong Kong. The common messaging from multiple Fed events was a deep current-quarter contraction, a possible second-half rebound, an incredibly uncertain outlook, and the likely need for more fiscal stimulus. April’s housing data was atrocious, jobless claims remained tragically high but slowed, and Markit PMIs showed some recovery in activity in May to a still-depressed level. On the week, the S&P 500 rose 3.0% and the 10-year yield inched up by 1.6 bps. Click here to view the full recap.