The Market Today

U.S. – China Relations Deteriorate As Virus Continues to Damage Global Economy


by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (Link to VS Covid-19 Chartbook)

Monitoring the Headlines on Re-opening: Foreign countries and more U.S. cities and states continued to take steps to loosen the lockdowns that have crushed economic activity. U.K. Prime Minister Johnson announced several changes that would take effect on the first of June, including outside gatherings of up to six friends or family members and opening schools, outdoor retail, and car dealers. In the U.S., Chicago’s mayor said the city would move to phase three next week and San Francisco said indoor retail and outdoor dining could open June 15. Illinois’s governor said phase three will began Friday.

Monitoring the Headlines on Activity: While some improvement has been noted in interest of air travel, Delta said it had offered early-out packages to employees and noted a large-scale recovery in demand could take up to three years. Sending a similar message, JetBlue said 60% of its workforce had taken voluntary unpaid time off and believes its June schedule will be 25% of normal. From the sports world, the English Premier League announced that soccer will restart June 17 while Boston’s mayor said the Boston Marathon had been canceled.

Monitoring the Headlines on Stimulus: The House passed a bill Thursday that would allow businesses more leeway in using the funds obtained through the Treasury and SBA’s Paycheck Protection Program (PPP) created by the CARES Act to protect workers and support small businesses. Businesses could spend more on non-payroll costs, up to 40% instead of the previous 25% limit, and over a longer timeframe, with the initially required eight-week period for spending the loaned funds extended to 24 weeks. Additionally, the covered period for rehiring workers to keep payroll levels consistent with pre-virus levels would be pushed to the end of the year.


TODAY’S CALENDAR

Personal Income Boosted by UI and Transfer Payments: Personal income rose by 10.5% in April despite a 8.0% decline in wages and a 12.2% drop in farm/non-farm proprietors’ income.  Offsetting the sharp losses were increases of 514% ($360b annualized) in unemployment insurance payments and 491% ($2.6t annualized) in “other transfers.”  The increase in “other transfers” reflected the distribution of federal economic support payments and was arguably a one-time event, perhaps two times depending on what the next stimulus package includes, and will revert from the income figures quickly.  However, the net benefit of the stimulus payments pushed total nominal income up from $18.7 trillion to $20.7 trillion.  While income rose, spending did not.  Spending fell a record 13.6% as lockdowns capped consumption.  However, the stimulus payments succeeded in boosting savings, with the savings rate soaring from 12.7% to 33.0%.  On a positive note, credit card data from multiple sources have recently shown an uptick in consumer activity.  As it relates to the April income and spending numbers, the BEA warns against the accuracy of the data, noting “The full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate for April because the impacts are generally embedded in source data and cannot be separately identified.”

Goods Trade Data Shows Sharp Drop in Imports and Exports: The advanced goods trade balance shows a $4.7 billion increase in the U.S. goods trade deficit as imports fell 14.3% and exports plunged 25.2%.  Exports in every category except food/feed/beverages were hammered.  The loss of global trade volume is likely to weigh heavily on smaller economies who remain highly trade dependent.

PCE Inflation Volatile for the Time Being: The April PCE inflation report showed another soft read for the Fed’s preferred gauge of consumer prices. Headline inflation fell 0.5% MoM bringing the YoY rate down from 1.3% to 0.5%.  While some of the weakness was oil-related, core prices also fell 0.4% MoM bringing the YoY rate down from 1.7% to 1.0%.  The Fed is likely to look through interim volatility in consumer inflation.

President’s Remarks on China to Drive Sentiment Today: At 9:00 a.m. CT, the final revision to the University of Michigan’s May report on consumer confidence is expected to inch higher.  At 10:00 a.m., Fed Chair Powell will  take part in a virtual panel discussion.  Driving the day today, though, will be President Trump’s comments on China.  There has been no time scheduled for the comments.


YESTERDAY’S TRADING

U.S.-China Tensions Finally Crack the Optimism: U.S. equities reversed sharply late in the day, erasing a 0.9% gain after President Trump said he would make an announcement on China today. After rising steadily throughout the day, the S&P 500 tumbled in the final forty-five minutes to close 0.2% lower. Investors had largely ignored brewing U.S.-China tensions, choosing instead to hope that re-opening the economy would lead to recovery. However, China proceeded to pass national security legislation for Hong Kong earlier Thursday, an action the U.S. had said could lead to a response. Before President Trump announced today’s press conference, one of his top advisers said China “made a huge mistake” when it “robbed Hong Kong of their freedom” and “will be held accountable.”

White House Looks to Weaken Internet Company Protections: In other news emanating from the White House, President Trump announced an executive order aimed at reducing protections that internet companies are provided under section 230 of the Communications Decency Act. The order follows a row between President Trump and Twitter related to the social media company adding a fact-check disclaimer to a couple of the president’s tweets. Twitter shares fell more than 4%. Treasurys appeared less affected by the developments, generally holding levels even as equities pulled back. The 2-year yield fell 1.0 bps to 0.17% while the 10-year yield moved up 0.8 bps to 0.69%.


OVERNIGHT TRADING

Investors Anxious Ahead of President’s Press Conference: Global investors appeared apprehensive Friday ahead of President Trump’s press conference on China. The latest development in a string of recent events raises the risk of renewed frictions between the world’s two largest economies and comes at an inopportune time with the world economy reeling from the virus. Another wave of global economic data released overnight was, on-balance, worse than expected and served as a reminder of the sharp global contraction. Stocks slipped 0.3% across Asia and 0.7% in Europe. Ahead of a flood of U.S. economic activity, S&P 500 futures were down around 0.2% and the Treasury curve had flattened lower amid a global rise in sovereign bond prices that had knocked the 10-year yield down 2.9 bps to 0.66%.


NOTEWORTHY NEWS

Pending Home Sales Plunge Again: Pending home sales plummeted again in April as nationwide lockdowns and economic uncertainty kept would-be buyers at home. Similar to March’s 20.8% plunge, the 21.8% slide in April was worse than expected and widespread across the country, with double-digit drops in all four regions. Since February, the pending home sales index has fallen more than 38% to an all-time low in records back to 2001. Despite the surprise uptick in the most recent new home sales report and encouraging signs from purchase applications since late-April, the report points to another weak month for existing-home-sale closings in May.

Williams Won’t Support Negative Rates: After sounding supportive of yield-curve control as a potential tool the Fed could use to enhance its accommodative position moving forward, New York Fed President Williams again dismissed the idea of adding negative rates to the central bank’s toolkit. “I don’t think negative rates is something that makes sense,” Williams said, adding, “we have other tools that I think are more effective and more powerful .” Addressing the tough road ahead, he noted “I think the big challenge is really about human behavior, it’s the psychology of the consumer.”


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