New Hope
After three phases of stimulus amounting to nearly $2.3T, there is hope of yet another stimulus package. Yes, that was a T! The phase four deal, to be completed at the end of April, calls for an additional $1T in spending. This phase would act to back stop the phase three programs. Perhaps even beef up funds to states who are lacking tax revenue with the stay at home/shelter in place orders.
On Thursday, President Trump tweeted… shocking I know! It referenced a potential OPEC/Russia deal that could lead to a 10M to 15M barrel cut in oil production. This bolstered markets and oil prices. March oil demand fell by approximately 35M barrels, so while helpful, it will likely not restore balance. Also, there is likely to be a demand that the US be in on any supply cuts. This is something the US has been reluctant to enforce on private markets. Regardless, the attempt to cut supply is encouraging to help demand. A deal is yet to be done as OPEC++ should be meeting sometime this week.
Lockdowns across Europe are starting to show progress. New cases of coronavirus are starting to reduce while fatalities remain high. This small bit of hope shows encouraging signs that efforts are starting to be effective.
China is showing signs that there is life after coronavirus. Economic data has quickly improved as Caixin/Markit PMI bounced from 40.3 in February to 50.1 in March. This V shaped recovery is something that may be delayed in the US till June at the earliest.
1) China’s stay at home order was a true quarantine of sorts.
2) Their lockdown ended after five weeks, getting the majority of China back to work early March.
3) PMI is a confidence index. The US has surpassed their infection/fatality rate. Our confidence is perhaps shaken to a greater extent.
Coronavirus Strikes Back
Unemployment data showed weakness for March, coming in at 4.4%. This, however, did not reflect the last two weeks of jobless claims. Jobs data reflect a mid-month finish point. April unemployment data will show the jobs lost at the peak of the stay at home order. Expect unemployment at 10% to 15% as the 10M jobs lost already represents approximately 6%-7% of the workforce.
Stimulus from the Federal Reserve Bank (FRB) has done a good job of supporting municipal bonds, mortgage backed securities, and investment grade bonds. The FRB’s mandate, however, prohibits them from taking losses. This prevents them from investing in the high yield markets as the default rate would cause known losses. The lack of support in the high yield market could signal heavy defaults in coming months. This is especially true given the high exposure to energy companies in the high yield index.
Conclusion
Stay cautious! While there is currently hope, there are going to be bumps that will still cause concern ahead.
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