The Market Today
Virus Proves More Damaging to Economy Than Initially Projected
by Craig Dismuke, Dudley Carter
Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT
VS Economic and Interest Rate Projections (and May Bloomberg Survey Results): We have updated our economic and interest rate forecasts, taking into account the unexpected size and persistence of the virus outbreak. We now expect the economy to contract 34% QoQ, SAAR in 2Q followed by a 25% rebound in 3Q. For the full year, we expect the economy to contract 5.5%. Longer term, we expect the recovery to drag on longer than expected, likely lasting through 2021. Based on this outlook, we believe interest rates will remain in historically-low ranges.
Monitoring the Headlines – From the Corporate World: A couple of major U.S. corporations echoed expectations for a slow recovery, with Bank of America’s CEO pointing to 2021 for a rebound and Delta indicating it expects demand to be weak for a couple of years. More optimistically, however, the bank’s chief said consumer activity is picking up some as states re-open and the airline’s CFO said they are seeing some recovery in bookings for domestic leisure travel. In other corporate headlines, Google’s CEO expects 70% to 80% of the company’s employees to work from home through the end of the year while VISA said a majority of its staff will do the same.
Monitoring the Headlines – Stimulus Watch: The need for additional stimulus relief remains among the most discussed topics in Washington. In addition to the Senate Banking Committee’s hearing discussed below, Senate Minority Leader Schumer said he expects the public will ultimately force Republicans to sign on to another enormous round of funding. A separate report, however, said Republican leadership wants to wait to see how re-opening of state economies goes before discussing the need for any new money. With a more targeted focus, President Trump and USDA Secretary Perdue announced an aid package worth roughly $19 billion for U.S. farmers.
Monitoring the Headlines – Re-opening Watch: President Trump lauded Georgia and Florida for pulling back some restrictions and said the U.S. is way ahead of schedule with its vaccine efforts. Vice President Pence said new cases in the U.S. are declining despite more tests being run. Singapore disclosed a three-phase plan to restart some activity from June 2. The Netherlands will open bars and restaurants on June 1. And the U.S. and Canada agreed to extend the ban on non-essential travel across the border until June 21.
Purchase Applications Continue to Improve in MBA’s Weekly Report: Mortgage applications for the week ending May 15 fell 2.6% as refinance applications fell 6.3% but purchase applications rose 6.4%. The 30-year mortgage rate fell 2 bps to 3.41% during the reference week. On the positive side, purchase applications have now risen in five consecutive weekly reports. As the MBA report highlights, purchase apps were down 35% YoY six weeks ago, but are now down just 1.5% YoY. Refis jumped in March to their highest level since 2008, but have since dropped 46%. According to the MBA report, the drop in apps along with the decline in average loan size was “potentially a sign that part of the drop was attributable to a retreat in cash-out refinance lending as credit conditions tighten. We still expect a strong pace of refinancing for the remainder of the year because of low mortgage rates.”
Fed Officials Explain Views before Release of Minutes: The FOMC’s April 29 Meeting Minutes are scheduled for release at 1:00 p.m. CT. The meeting almost certainly included a discussion of the Fed’s toolkit including some untested tools like rate caps/pegs and negative rates. Fed officials have front-run whatever message is in the Minutes with a barrage of communications over the past week. The themes have included: 1) the economy continues to face significant risks, 2) the Fed is prepared to use all of its tools as it deems necessary, 3) negative rates are not currently on the table, and 4) no tool is off the table over the longer run.
Mixed Earnings from Home Depot and Walmart Kick-Off Down Market Day: The major U.S. equity averages fell back Tuesday after a strong start to the week following mixed earnings reports from a couple of household names and on a report questioning the robustness of the preliminary findings on Monderna’s vaccine candidate. Futures were little changed on net ahead of U.S. trading after Home Depot shares fell following an earnings miss while Walmart jumped as the company topped estimates for revenue and profits. Both stocks and yields showed little excitement during testimonies from Treasury Secretary Mnuchin and Fed Chair Powell before the Senate Banking Committee on the joint response to support the economy from the unprecedented virus shock.
Report Spoiled Moderna Excitement: However, a climb back towards even on the day broke down around 2 p.m. CT on a headline questioning whether Moderna’s Monday report of positive trial results was worthy of the sharp market response it sparked. The article from STAT, a popular medical publication, cautioned, “Several vaccine experts…concluded that, based on the information made available…there’s really no way to know how impressive — or not — the vaccine may be.” Moderna fell 10.4% after soaring 20% to start the week, although most of the losses occurred before STAT headline. The S&P 500, nearly back to unchanged, tumbled in the final hour to close down 1.6%. Treasury yields made new lows with equities as the 2-year yield edged 1.2 bps lower to 0.17% as the 10-year yield dropped 3.7 bps to 0.69%.
Global Markets Extend Sideways Slide as Uncertainty Persists: May’s up-and-down sideways grind for global markets continued overnight as European equities fluctuated in and out of positive territory and U.S. futures recovered after declining on Tuesday. The uncertain trends for Europe’s Stoxx 600 had, however, lifted the index into positive territory after an opening dip on concerns about the STAT report yesterday on Moderna’s vaccine trial. Asian markets on average had earlier closed marginally positive and U.S. equity futures were notably stronger after yesterday’s slide.
Earnings Again a Story as U.S. Stocks Look to Recover: Corporate earnings were again a pre-market story in the U.S. with shares of Lowe’s up more than 6% on a strong report and Target’s stock inching higher after beating sales and earnings estimates. A shift to less-profitable essential goods weighed on Target’s margins more than expected while Lowe’s sales growth topped estimates and the same metric at competitor Home Depot. At 7:30 a.m. CT, index futures were up around 1.2% and Treasury yields had crept higher with the 2-year yield up 1.0 bp to 0.18%, the 5-year yield 1.9 bps higher at 0.35%, and the 10-year yield rising 2.3 bps to 0.71%.
Powell and Mnuchin Appeared Before the Senate Banking Committee: In a virtual testimony alongside Treasury Secretary Mnuchin, Chair Powell again stressed the unprecedented nature of the current shock and pledged full use of the Fed’s toolkit to support the economy until activity picks back up. Secretary Mnuchin said more of the CARES Act funding could be put into place once the related facilities are up and running, which both officials expect by the end of the month. Taking turns responding to questions, the pair of U.S. financiers explained the intricacies of the various emergency lending programs and signaled a willingness to be flexible and adapt to prevent a steeper downturn that could have lasting effects on the economy’s productive capacity. The spirit of most questions appeared to be to ensure no individuals or small businesses fell through the cracks of the complex array of facilities, with particular attention paid to the need for significant funding for state and local governments. As he has before, Powell stressed it may be necessary to do more to keep liquidity problems from morphing into damaging solvency issues.
Rosengren Said Re-Opening Doesn’t Necessarily Mean Activity Resumes: Boston Fed President Rosengren cautioned that re-opening state economies doesn’t mean activity will quickly pick back up. Consumers must feel safe, he said, which depends on the virus being contained and defeated. He expects activity will pick up in the second half of the year but that unemployment will end 2020 in double-digits.
Kashkari Sees Long Road to Recovery: Minneapolis Fed President Kashkari said, “strong economic growth,” is “probably a year or two away.” Addressing the hot topic of negative rates, he noted, “I think all of us believe that there are other tools that we would use before we would consider going negative.”