The equity market had its worst week in two months after disappointing economic releases and on the back of news that the US will block semiconductor shipments to Huawei. The escalating trade tensions, severe decrease in retail sales, and sharp decline in core inflation from 2.1% to 1.4%, all lead to a disappointing week in the market. Major indexes decline ~1% to 3% and it was the third negative week out of the past four. This drove a slight flight to safety as the 10 year Treasury tightened ~4bps, to .646%, even in the face of increased auction sizes.
Economic reports continue to reflect the devastating impact of the coronavirus on the U.S. economy. Another 2.98 million jobless claims filed from May 3-9 (U.S. unemployment is expected to reach 17% in June), as retail sales fell a record 16.4% in April, while industrial production fell 11.2%.
Consumer sentiment has begun to rise, as small businesses in the US are expecting conditions to improve as 48 of 50 states are easing restrictions to some degree. Some investors are pointing to the bottom of the coronavirus-induced economic cycle. Much of the crippling economic impact was driven by government action, and as restrictions are lifted, investors are seeing potential improvement in the months ahead.
U.S. Federal Reserve Chairman Jerome Powell urged the White House and Congress last week to increase spending further to address the negative impacts of COVID and support the economic recovery. While the House passed a bill for additional economic relief on Friday, it’s not expected to pass the Senate, leading Congress back to the drawing board. However, the potential additional stimulus package and more accommodating language from Chairman Powell over the weekend has led to futures pointing positive for the week ahead.
The federal government has already provided $2.9 trillion in economic relief so far to businesses and consumers affected by the coronavirus-induced shutdown. The Federal Reserve has also acted aggressively to support the economy during this time, providing over $2 trillion in low-cost, and potentially forgivable, funding to businesses and consumers. While the federal response has provided much needed aid, the coronavirus relief to date is 14% of the country’s GDP, and the federal deficit currently stands at ~107% of GDP.
Companies continue to tap the bond market at a record rate to ride out the coronavirus downturn. $159.7bn of investment grade (IG) issuances came to market last week, marking the third straight session of $80bn+ issuances. Due to a period of increased monetary and fiscal stimulus, IG spreads have remained stable at ~228 bps, allowing for a steady supply of syndicate. Last week issuance was led by BBB+ at $32bn in issuance and $52bn in the financial sector. Royal Caribbean placed their first issuance as a fallen angel and pledged 28 ships as collateral. They issued a 3-year at 10.875% and a 5-year no call 2 at $97 and a coupon of 11.5%.
The high yield market saw $30.8bn of new issuances last week, as over 70% were slated for general corporate purposes. Some of the notable non-energy names that upsized their issuance included Live Nation Entertainment and Uber Technologies. High yield funds saw inflows on the back of rising oil prices; additionally, there is a shift to the retail sector as the problem child in the high yield market. The default rate for the S&P has raised to 2.67%, up from 2.32% in April.
U.S. crude prices increased to ~$32 from ~$26 last week as easing containment measures prompt expectations of increased oil demand as drivers returned to the road. Strong signs of compliance with OPEC and cuts to supply both added to the improving market sentiment. The largest producers within OPEC continued June output cuts which could be extended further. These measures should keep oil prices on a steady rise and investors will look to improved oil demand driven out of Asia as a good indicator for future prices.
Going into the holiday weekend we still have a host of economic data we’re looking to, most notably, the weekly unemployment claims and existing home sales. The market will continue to digest Powell’s 60-minute interview, which is being interpreted that the Fed is willing to do whatever it takes to support the economy. In reality, the most important key indicator will be if there is a spike in new cases from states that are the first to ease restrictions, and the market will be reacting accordingly.
US Barclays Agg +4.86%, 1.41% yield, -304 bps excess return
US Barclays Corp +0.72%, 2.71% yield, -999 bps excess return
UST 10yr 0.65% yield, -127 bps
S&P 500 2,863, -11.36%
DJIA 23,685, -17.01%
OIL (WTI) $29.71, -51.46%
Gold 1,754, +15.40%
Spring has sprung and with it, more economic activity and hopes for a more sustained recovery emerge.
We sat down to interview two of IMTC's senior managers on their perspective as former fixed income portfolio managers.