Civil Unrest Enters Trading Calculus

Jun 01, 2020

Civil Unrest, Trade War Saber-Rattling, and Reopenings

There is a calm in the markets this morning that belies the mood of the nation after a weekend of civil unrest in dozens of US cities that reached all the way to the gates of the White House. Without exploring the larger issues behind the protests, the events and damage will certainly slow the reopening process, to what degree is still to be determined. Prior to this weekend’s events, equities were singularly focused on hopes for positive news on reopenings. Late last week, however, Beijing legislation curbing Hong Kong autonomy were enough to rekindle trade war fears. So, the competing forces of reopening optimism are being countered by fears of renewed trade wars. The civil unrest unleashed in the US over the weekend adds another element to the trading calculus. Meanwhile, the May Employment Report will deliver another round of sobering news but one that is not expected to be worse than the historically bad April report. Expectations are for a decline of nearly 8 million workers versus 21 million in April, and the unemployment rate is expected to rise to 19.7% versus 14.7% in April. Also, we’ll get the ISM Manufacturing Index (today) and Non-Manufacturing Index (Wed.), adding to the list of dreadful reports of late. Expectations for both series are for a slight bounce and that will be all the market is looking for: that a bottom was found in April and the long climb out began in May.

Derivative Market Rates

Brokered Deposit Rates

Treasuries
Treasury Curve	Today	Week Change
3 Month	0.12%	+0.01%
6 Month	0.14%	+0.01%
1 Year	0.15%	-0.01%
2 Year	0.17%	-0.01%
3 Year	0.20%	-0.03%
5 Year	0.31%	-0.05%
10 Year	0.66%	-0.03%
30 Year	1.43%	+0.03%

Short-Term Rates
Fed Funds	0.25%
Prime Rate	3.25%
3 Mo LIBOR	0.34%
6 Mo LIBOR	0.51%
12 Mo LIBOR	0.67%
Swap Rates
3 Year	0.264%
5 Year	0.359%
10 Year	0.659%

Economic Calendar
Date	Statistic	For	Briefing Forecast	Market Expects	Prior
Jun 1	ISM Manufacturing Index	May	43.5	43.8	41.5
Jun 3	ADP Employment Change	May	-9.500mm	-9.500mm	-20.236mm
Jun 3	Factory Orders	Apr	-15.0%	-14.0%	-10.4%
Jun 3	ISM Non-Manufacturing Index	May	44.0	44.5	41.8
Jun 4	Initial Jobless Claims	May 30	2.000mm	1.800mm	2.123mm
Jun 5	Change in Nonfarm Payrolls	May	-8.000mm	-8.000mm	-20.537mm
Jun 5	Unemployment Rate	May	19.5%	19.7%	14.7%
Jun 5	Avg. Hourly Earnings MoM	May	1.0%	0.9%	4.7%
Jun 5	Avg. Hourly Earnings YoY	May	8.9%	8.5%	7.9%

Top 5 Events for the Week

June 1— 5, 2020

1. Reopening & US/China Developments — All Week
2. Congressional Actions — All Week
3. May Employment Report — Friday
4. May ISM Readings — Monday/Wednesday
5. Initial Jobless Claims — Thursday

1. Reopening & US/China Developments — All Week

The equity market had been almost singularly focused on hopes for positive news on reopenings and that was enough for stocks to retrace all but 15% of the 37% decline. Late last week, however, the ongoing disturbances in Hong Kong and Beijing legislation curbing Hong Kong autonomy were enough to rekindle fears of another round of trade wars. President Trump threatened financial sanctions against China and that put equities under pressure and renewed a bid in Treasuries as a flight-to-safety trade ensued. So, the competing forces of tentative optimism over reopening are being countered by fears of renewed trade war maneuvers. The civil unrest unleashed in the US over the weekend adds another element to the trading calculus and the three forces will likely guide most of the trading direction this week.

2. Congressional Actions – All Week

Meanwhile, states and cities are fixated on the Senate to see if they will start to advance a bill to bridge the expected hole in revenue stemming from the quarantine measures. While the House passed a $3 trillion bill that included $1 trillion for states and cities it has no hope of being considered in the Republican-controlled Senate. The twin recommendations from Fed Chair Powell and Treasury Secretary Mnuchin that more stimulus, especially for states and cities, is needed may be, however, enough to spur Majority Leader McConnell into action. The urgency to act, however, seems to be missing so looking for something to happen this week may be a bit premature.

3. May Employment Report – Friday

The May Employment Report will deliver another round of sobering news but one that is not expected to be worse than the historically bad April report. Expectations are for a decline of nearly 8 million workers versus 21 million in April, and the unemployment rate is expected to rise to 19.7% versus 14.7% in April. Markets will likely only look on with bemusement, much like one rubbernecks a car wreck, as the trading focus will remain on reopening news, any rekindling of the US/China trade war, and the civil unrest in the US.

4. May ISM Readings — Monday/Wednesday

In addition to the jobs report on Friday we’ll get the ISM Manufacturing (today) and Non-Manufacturing Index readings this week that will add to the list of dreadful reports. The manufacturing index is expected to print a 43.8 versus 41.5 in April. The non-manufacturing index is expected print 44.5 versus 41.8 in April. If expectations for both series are met it will be all the market is looking for: that the bottom was put in in April and that the long climb out of the hole began in May and hopefully continuing into the summer months.

ISM Indices

5. Initial Jobless Claims — Thursday

Weekly jobless claims continue to provide the most immediate read on the impact of the economic shutdown. The expectation for this week is for 1.80 million additional jobless claims. The high for claims was 6.9 million on April 4. Cumulative claims have now reached 41 million over the last ten weeks while continuing claims are just over 21 million, which is more indicative of the current number of insured unemployed. In any event, with continuing claims over 21 million, the official unemployment figure is likely to approach 20% for May when its released on Friday.