Market Commentary

Re-Opening Economies While Watching Unemployment and Debt Issuance

People and investors around the world find themselves at a pivotal moment as the debate around the pace and practices to re-open the economy persists. Despite continued daily volatility, markets remained relatively stable on a week over week basis, with the 10yr US Treasury rate unchanged at 0.61% and oil finding a stable footing.

The globe begins to re-open, albeit slowly

Hard hit areas like Italy and Spain are beginning to relax limitations around movement and activity as most EU countries have passed their initial peak of infection. New Zealand had no new cases for the first time since March. Denmark and Germany go in to their second week of their re-openings with signs additional infections remain limited. The Danes figured out early the key is re-opening schools first in order to allow parents to go to work or at least work more efficiently from home. As closed countries look to the recently re-opened ones for best practices on how to proceed, any sign of secondary outbreak could send the global economy reeling as confidence is already quite fragile.

Powell still on the offensive given unknown outlook, but needs fiscal help

FOMC Chair Jerome Powell remains in full economic protection mode given the impact from COVID-19 and the unknowns around the extent of the recovery; he made it abundantly clear that the Fed has more tools at its disposal to support the economy. Though the Fed doesn’t have a dollar value limit on credit facilities it can deploy to support lending, it cannot do this alone, and additional fiscal policy measures may be needed to push the economy to full employment. The White House seems to be on the same page as they appear to be working on a third round of the Paycheck Protection Program (PPP). All this is too late and not enough for the likes of J.Crew, who filed for bankruptcy protection this morning. This is probably only the beginning of these types of headlines for the retail sector.

April debt issuance rebounds from March and performance stabilizes

Given the range of the Fed’s liquidity support measures announced in April, the bond market stabilized, and syndication re-opened with a significant uptick in issuance versus March. As companies sough more cash to get through a shutdown economy, corporate debt issuance for the month was a record $364 bn and $300 bn on a net issuance basis, 85% of the total net issuance for all of 2019. Municipal issuance in April alone rebounded up 40% versus March (26.1 bn vs. 18.6 bn) as spreads settled down. The Fed support measures also led risk assets to outperform on the month. The Bloomberg Barclays Credit Index tightened by -64 bps MoM, to +191 bps, outperforming duration-matched Treasuries by +391 bps, reversing at least some of the negative performance experienced YTD (-953 bps).

Jobs remain a key concern, hoping for a bottoming by June

This week the key data will certainly be the US Employment Report for the month of April where expected job losses are meant to be roughly 21.5 million and the unemployment rate is expected to jump to 16.1%. Given last week’s initial jobless claims data that showed an additional 3.8 million individuals file for unemployment, the US economy has now lost 30.3 million jobs in total since the outbreak of COVID-19 in March. Although the number of losses remains extremely high, they are coming down from prior weeks and as the economy re-opens, that should limit the extent of further damage in those areas. This points to potentially seeing the bottoming of job losses in June and to the uneven recovery expected across the country. In addition, investors will be watching global PMI data to gauge the extent of the damage from the virus and get a sense of how companies are looking ahead in parts of the world that are starting their path towards re-opening. The Senate returns today as well. Remember to mail your Mother’s Day cards! Happy investing.

YTD Returns as of EOD Friday 05/01/2020

US Barclays Agg      +4.86%, 1.35% yield, -294 bps excess return

US Barclays Corp    +1.08%, 2.72% yield, - 953 bps excess return

UST 10yr                  0.61% yield, -131 bps

S&P 500                   2,830, -12.38%

DJIA                          23,723, -16.87%

OIL (WTI)                  $19.69, -67.83%

Gold                           1,710, +12.51%

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