Another week marked by large moves seems almost normal now. Almost. This week the moves were generally up, and as it turned out, it was the best weekly gain for the S&P 500 since October 1974.
And because the market is a fickle beast, the rally unfolded against a backdrop of more lousy economic news. The main report was Thursday’s initial jobless claims number. Another 6.6 million applied for unemployment. This comes on the heels of the previous week’s 6.6 million.
Close to 17 million people have applied for unemployment benefits since the COVID-19 crisis started, roughly 10% of the labor force. We should expect much higher numbers. To quote JP Morgan:
“More recently, however, we are starting to get some shreds of data on the magnitude of the economic crisis. Over the last three weeks jobless claims have cumulated to 16.8 million. With these data in hand we think the April jobs report could indicate about 25 million jobs lost since the March survey week, and an unemployment rate around 20% (our final estimates will be refined later in the month).”
For what its worth, many of the job losses are coming through furloughs, not outright dismissal, as you can see below.
This could make a difference in the speed of the rebound when it comes. It may make it much easier for people to return to work if they go back to their old job. But much will depend on how long the shut-down persists.
The only other major economic report was Friday’s inflation number. Consumer prices dropped by the most in five years due in large part to the collapse in oil and helped by falling airline ticket and hotel room prices. The consumer price index slipped 0.4% in March (as you can see below) while the annual rate fell to 1.5% from 2.3%.
If you exclude food and energy prices, the core consumer price index slipped by a more modest 0.1%, but this was the first fall in more than a decade.
They Found Another Sink
Just a couple weeks ago the headlines were full of sink references. When the Fed cut rates to 0% and started unlimited quantitative easing the media said the Fed was throwing everything and the kitchen sink at the crisis. Well, apparently the Fed found another sink this week.
The Fed took several more actions to cushion the economy by providing up to $2.3 trillion in credit to businesses and state and local governments. Digging too deep into the details will make your eyes bleed, but essentially, they plan to offer credit through three new lending facilities while expanding three existing programs:
– The largest of the new facilities is the establishment of the Main Street Lending Program, which will partner with commercial banks to provide up to $600 billion in credit to small- and mid-sized businesses (less than 10,000 employees and or $2.5 billion in revenues).
– The second new facility is the Municipal Liquidity Facility to buy up to $500 billion in short-term obligations from states and large cities (over one million population) and counties (over two million population).
– The last new facility is the Paycheck Protection Liquidity Facility which will provide term funding to banks against PPP loan collateral. The idea is to incentivize commercial banks to participate in the PPP.
– Existing programs that lend to the corporate sector were also upsized from $200 billion to $750 billion. More controversially, both of these facilities were expanded to include corporations whose ratings were downgraded from investment grade after March 22nd. The Fed will for the first time be lending to junk rated corporations. Furthermore, the Fed will now buy high-yield ETFs. Another unprecedented step.
The move to buy high-yield saw an immediate reaction in the capital markets. The largest high-yield bond exchange traded fund — known by its ticker HYG — soared 6%, putting it on pace for its biggest one-day gain since the financial crisis. A barometer of higher quality investment-grade corporate bonds, the ETF called LQD, rose more than 3%.
This latest move comes on the heels of former Fed Chairwomen Janet Yellen calling on Congress to give the Fed the power to buy stocks. Talk about turning Japanese!!!
All this Fed activity is showing up in the numbers. On Thursday the Fed updated us on the size of their balance sheet – It’s now over $6tn, up $1.7tn since the crisis began.
Crossing the Rubicon
One thing the Fed isn’t doing yet is directly monetizing fiscal deficits. By that we mean buying government bonds directly off the Treasury. At least for the time being the Treasury has to sell bonds to the private sector, absorbing savings, before the Fed turns around and buys the debt. While a maybe a fine distinction, direct monetization has been a step too far (although proponents of Modern Monetary Theory advocate just such a practice).
However, as the Financial Times reported on Thursday, the Bank of England is willing to blaze new trails:
“The UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England agreeing to a Treasury demand to directly finance the state’s spending needs on a temporary basis.
The move allows the government to bypass the bond market until the Covid-19 pandemic subsides, financing unexpected costs such as the job retention scheme where bills will fall due at the end of April.”
This whole thing is a little like a magic money tree. You need a couple trillion for unemployment benefits? Shake the tree. $3tn to bailout the corporate bond market. Shake the tree.
As the FT reports, at least over the short-term there is no limit to the amount of shaking that can go on:
“In a statement to financial markets on Thursday, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility”, which normally stands at just £370m.
This will rise to an effectively unlimited amount, allowing ministers to spend more in the short term without having to tap the gilts market.”
Some Charts We Are Watching
1) While not a chart, the IRS just launched a website for those who don’t file a tax return so they can claim their $1200 check. Link here: https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here
2) Only 94K people flew yesterday. On 4/9/19 it was 2.2 million.
3) Next week should tell us a lot about if the U.S. case count is tracking Italy.
4) Some less bad news out of New York on Friday. The number of hospitalizations fell materially this last week.
As BCA noted:
“…not only are new cases falling precipitously in the Big Apple but so is the number of new hospitalizations and deaths. Moreover, the number of people catching severe respiratory illnesses is also declining precipitously. This decline in new cases in New York City is crucial. Not only is New York the largest city in the US, but also, it is the epicenter of the US epidemic. Thus, a lower number of new cases indicates that health authorities are beginning to control the spread of the disease in this primordial center. This very positive sign suggests that the quarantines in the US will not have to last beyond the second quarter of 2020 and that the economy can recover by the second half of the year.”
5) COVID-19 is now the number one cause of death in the U.S. as of April 8th. What is also striking in the chart below are the daily numbers for heart disease and cancer.
6) Ken Fisher always calls the market the great humiliator – the market will go do its upmost to make you feel like an idiot most of the time. Example 3,782:
This week saw an outflow from equities of more than $60 billion. That’s around 0.7% of the total asset base and is 50% more extreme than any outflow in almost 20 years. And so of course the market had its best week in almost 50 years.
7) This feels about right. Coffee is always important. Shaving – not so much.
Have a good weekend.
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