The Market Today

Virus Continues to Plague Markets, Confidence, Outlook


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Show Virus Has Not Yet Affected Labor Market: In a positive sign that the disruption caused by the virus has yet to affect the heart of the U.S. economy, initial jobless claims for the week ending February 29 remained very low, falling from 219k to 216k. Given the growing severity of the travel disruptions, we anticipate this will begin feeding through the labor market over the next several months.  The duration of the disruption is now the central question.  Heading into tomorrow’s February payroll report, all signs point to a strong number, including a temporary boost from the hiring of census workers.

January Factory Orders Report Expected to Show Core Strength: At 9:00 a.m. CT, the January Factory Orders report will be released.  The report is expected to show weakness in transportation items but strength at the core level.

Fedspeak Including Comments from Williams: Investors will hear from Dallas Fed Bank President Kaplan, Minneapolis Fed Bank President Kashkari, and New York Bank President Williams today.  Williams’s comments tonight at 7:45 p.m. CT will be particularly insightful given his influence on policy decisions.


YESTERDAY’S TRADING

Virus Effects Continued to Grow: Stocks surged back Wednesday as investors continued to balance the continuous negative headlines around the virus’s spread with the growing list of groups ready to offer offsetting stimulus. Prior to the U.S. session, another Chinese PMI and one in Hong Kong plunged to record lows in February. The European Commission noted that the virus and its effects could throw Italy and France into a recession if it isn’t quickly contained. Later, Italy announced it was shutting its schools down for two weeks. There were more U.S. cased reported, including in New York and Florida, as well as the first death in California. Numerous industry conferences and trade shows continued to be affected and business leaders from top airlines gathered at the White House for a briefing. Later, United Airlines said it was cutting the number of flights and freezing hiring while France’s Airbus could cut production of some aircraft because the virus’s effect on its customers’ businesses.

Amount of Stimulus Continued to Grow: However, the number of groups offering economic stimulus to cushion activity from the negative effects of the virus also continued to grow. The Bank of Canada cut its target rate by 50 bps to 1.25% in response to the “material negative shock” caused by COVID-19. An official with the Bank of England said the virus could have a significant impact and there may be a role for monetary policy to help mitigate the effects. The IMF announced $50B in funds to help less affluent countries deal with the virus and the U.S. house passed a bill to provide more than $8B in funds to help fight the domestic spread. Australia’s Treasurer said he expected “very significant” economic effects and noted the government was exploring immediate assistance for affected businesses.

Investors Hope Stimulus Can Float Activity Until Containment: Added to the positive overnight boost from Vice President Biden’s strong Super Tuesday showing and a solid ADP report, hopes the coordinated global stimulus will buoy activity until the virus can be contained sent U.S. equities sharply higher. Extending the recent run of volatility, the Dow rallied 4.5% after declining 2.8% on Tuesday. The S&P 500 jumped 4.2% to recover all of Tuesday’s 2.7% decline. The daily dynamics helped lift Treasury yields well off their lows and notably steeper. Prospects that the Fed will remain accommodative amid the influx of global stimulus kept downward pressure on shorter yields while longer yields climbed for just the second time in ten sessions. The 2-year yield inched down 0.6 bps to 0.69%, a low back to August 2016, while the 10-year yield added 5.2 bps to 1.05%. The spread between the two maturities shot 6 bps higher to 35 bps, the highest since June 2018.


OVERNIGHT TRADING

Uncertainty, Market Volatility Remains High: The recent neck-breaking volatility has continued on Thursday as European equities and U.S. futures ripped lower shortly after the open following a mostly upbeat day across Asia. The MSCI Asia Pacific Index gained 1.2% overnight, up for a fourth time this week after sliding in 11 of the previous 12 sessions. While new cases have remained low in China after slowing in recent weeks, case counts in Europe and the U.S. have continued to grow. Italy, behind only South Korea as the hardest-hit country outside of China, is discussing a stimulus package worth more than $5B to help fight the virus’s economic effects. In the U.S., California’s governor declared a state of emergency after reporting its first death on Wednesday linked to another cruise ship. The same ship, on a separate cruise, is currently being held off the coast of California so those on board can be tested.

2-Year Yield Falls Again in Longest Slide in At Least Forty Years: Around 7:15 a.m. CT, Europe’s Stoxx 600 had dropped 1.6% and S&P 500 futures were off more than 2%, near the overnight lows after declining steadily since the open of Asian trading. Treasury yields have taken two steps lower and were trading near their lowest levels of the day. Continuing the recent slump, the 2-year yield was down 8.0 bps to 0.61%, a new low back to 2016, and the 10-year yield had declined 10.0 bps to 0.95%, an all-time record if it were to hold through to the close. The 2-year yield has fallen in 11 consecutive sessions through Thursday, marking the longest string of daily declines in at least four decades. Yields fell to new lows after the Fed’s 14-day repo operation was oversubscribed by nearly three times.


NOTEWORTHY NEWS

Services PMIs Point in Different Directions: There was mixed messaging around how the U.S. services sector managed through coronavirus uncertainty in February as the ISM and Markit PMIs painted widely divergent pictures of activity. Just before the ISM results were released, Markit’s services PMI was unrevised at 49.4, confirming the contractionary signal from the initial estimate and holding at its lowest level since 2013. The news release cited a “knock from the coronavirus outbreak and growing uncertainty about the economic and political outlooks.” Conversely, and somewhat confoundingly, the ISM’s Non-manufacturing Index rose unexpectedly to a 12-month high of 57.3 on relatively solid fundamentals. New orders surged to one of the best levels of the cycle, backlogged orders led all gains, and employment recovered. However, current production slowed and the comment section included several mentions of the virus. Considering the current economic environment, the sanguine signal from the ISM will be viewed skeptically for now.

Beige Book Echoed Powell that Business Contacts Have Become Concerned About the Virus: The Fed’s February Beige Book, based on information collected from January 7 until February 24, showed a slight uptick in the pace of growth since late last year but growing concerns about the global spread of COVID-19. Economic activity expanded at a “modest to moderate” pace during the period, compared with a modest expansion in the January report. However, the words “virus” (50 times) and “COVID” (9 times) appeared in the discussion for the first time. “There were indications that the coronavirus was negatively impacting travel and tourism in the U.S.,” the Fed noted, and “some supply chain delays were reported” across the manufacturing sector with “producers fear[ing] further disruptions in the coming weeks.” Discussing the near-term outlook, “the coronavirus and the upcoming presidential election [were] cited as potential risks.”


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