The Market Today

Virus Remains the Focus; Personal Income Remains Boosted by Federal Backstop

by Craig Dismuke, Dudley Carter


VS Coronavirus Chartbook (PDF) (Link)

Tracking Case Count: Florida reported another above-average jump in new cases and the governor said he currently has no plans to push the state to its next phase of reopening. Apple announced it was closing 14 stores in Florida, taking the total stores the company has reclosed to 32. California reported a new record for tests in a day and the second biggest jump of its outbreak. The governor announced hospitalizations were up 32% over the last 14 days and declared a budget emergency to unleash monies from the state’s rainy day fund to help offset the cost of fighting the virus. However, the most concerning news came from Texas where the governor suspended elective surgeries to alleviate pressures on hospital capacity. Houston announced that the city’s hospitals’ ICUs had reached capacity. Texas’s governor signed an executive order halting any further reopening as the state posted another above-average increase in new cases.


Increase in Unemployment Payments Partially Offsets Decline in CARES Act Payments in May Income Report: Personal income fell 4.2% in May after jumping a record-high 10.8% MoM in April.  After falling 7.5%, employment income did increase 2.5% in May, but remained weak.  After increasing 90% in April, transfer payments from the government to individuals declined 17.2%, remaining very high historically.  Most of the one-time payments from the CARES Act filtered through to households in the form of transfers in April, although it appears some continued to make their way through in May.  Partially offsetting the drop in one-time payments (-$1.97 trillion, annualized) was a $825 billion (annualized) increase in unemployment payments, most of which came from the pandemic unemployment assistance program.  All told, personal income remained higher in May, thanks to the massive stimulus efforts, than before the COVID outbreak.  This is unlikely to remain the situation.

Personal Spending Improves but Remains Weak: Personal spending did pick up in May after slowing 12.6% in April and sending the savings rate above 32%, its highest level on record.  Spending increased 8.2% and brought the savings rate back down to 23.2%.  Spending remains 12% below its January level, although there is sufficient pent-up savings to push spending back to pre-virus levels if income stabilizes, which appears unlikely.

PCE Inflation Inches Up: The inflation data has largely been moved to the backburner for now with markets and officials entirely focused on the virus’s path and chances for a sustainable recovery from a historic recession. However, with the biggest current threat on the inflation front being further disinflation, or a troublesome bout of deflation, the 0.1% month-over-month increase for both the headline and core PCE price indexes likely provides some comfort. The monthly changes – the result of another rise in food prices, a smaller drag from energy commodities, and recovery in pricing for durable goods – nudged the headline year-over-year rate down from 0.6% to 0.5% and kept the core rate unchanged at 1.0%.

Consumer Confidence Revision: At 9:00 a.m. CT, the University of Michigan’s revision to consumer confidence in June is expected to be slightly better, although still depressed from 2015-2019 levels.


Stocks Stuttered Early Amid Global Weakness and Mixed Economic Data: U.S. markets held their ground on Thursday as investors seemingly brushed off more bad news related to outbreaks across several U.S. states. Stocks opened into relatively weak global trading and slumped early after a mixed bag of economic data continued to paint a opaque outlook for the economy. Business investment was better than expected in May but new initial jobless claims fell less than expected and continuing claims, despite declining more than anticipated, remained extremely elevated. After quickly recovering, the major indexes showed little response to the latest concerning headlines on the virus, fluctuating sideways near the flatline until the final hour of trading.

Banks Led Late Surge That Lifted All But One Sector: While most of the session evidenced little conviction to buy or sell, stocks whipped higher to push the S&P 500 from even to a final gain of 1.1%. All but one sector rose on the day with financials leading as the clear outperformers. The rally followed the Fed’s announcement that was easing certain aspects of the Volcker Rule and before the results of the latest stress tests. After markets closed, the Fed reported that the “large banks remain strongly capitalized” but also announced it was requiring big banks to suspend buybacks and cap dividends in the third quarter to protect capital amid elevated virus uncertainty. Treasury yields slowly recovered from overnight declines to end the day little changed. The 2-year yield inched down 0.2 bps while the 10-year yield edged up 0.7 bps.


Markets Set for Uneven Finish to Worrisome Week of Virus Headlines: A week of worries about a surge of infections in the U.S. and virus hotspots identified in other regions looks set for an uneven finish. Equities rose across Asia and Europe while U.S. futures fell flat following yesterday’s bank-led rally. The major U.S. banks were weaker in the pre-market after the Fed’s post-market announcement Thursday related to dividend caps and buyback suspensions. While futures tracking all three major U.S. indexes were lower ahead of the morning’s economic data, the Dow lagged back with larger losses. Nike, carrying a weight of 2.7% in the Dow, dropped more than 3.5% ahead of the open after reporting an earnings miss Thursday after markets closed. Following the slight miss on personal spending in May, the Treasury curve added to an overnight move lower, pushing the 2-year yield down 1 bp to 0.18% and the 10-year yield 2.5 bps lower to 0.66%.


Fed Officials Clinging to Recovery Hopes Even as Risks Rise with Virus Spread: Fed officials continue to monitor developments related to the U.S. outbreak with the obvious implications for economic activity. Regional Fed Bank Presidents Bostic (Atlanta) and Kaplan (Dallas) indicated a base-case expectation for a second-half rebound, while also acknowledging the risks to that outlook remains high. Bostic called accelerating infections a “real source of concern” and Kaplan said “the jury is still out” on which direction the pandemic is headed. Bostic reminded that economic activity is highly correlated with confidence, making curbing the virus imperative for full recovery. Kaplan said there are limits to what the Fed can do and “targeted fiscal policy” may be more effective from here. Kansas City Fed Bank President George said the pandemic will pose “persistent risk” to the economy and “it might be a while” before the Fed has a feel for what it should do next.

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