Reopenings, Vaccines, and Fiscal Stimulus Spotlight the Week

May 18, 2020
Moderna Lab Worker

Reopenings, Vaccines, and Fiscal Stimulus

Much like the last several weeks, trading will once again be focused on assessing the status of the partial reopenings and any virus news. On that latter front, some upbeat news on phase 1 vaccine trials has set the market on a risk-on mood this morning.  Last week, equity markets took a breather from their recent rally, trading lower three out of five days, but the losses were relatively modest (646 Dow points). Meanwhile, fiscal stimulus will get some headlines this week. The Senate is expected to consider a much more limited version of the House-passed $3 trillion bill with aid likely limited to states and cities. Pundits speculate that a $1 trillion package to states and cities may garner enough support to pass. Speaking of fiscal stimulus,   Fed Chair Powell will be testifying on Capitol Hill tomorrow along with Treasury Secretary Mnuchin. You can bet both will be asked whether more fiscal stimulus spending is needed and Powell, at least, is likely to reiterate his comments from last week that it is. That expectation is boosting equities as well.


Treasuries
Treasury Curve Today Week Change
3 Month 0.08% -0.02%
6 Month 0.14% +0.01%
1 Year 0.12% -0.01%
2 Year 0.15% UNCH
3 Year 0.19% -0.02%
5 Year 0.31% -0.02%
10 Year 0.66% -0.03%
30 Year 1.36% -0.05%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.29%
6 Mo LIBOR 0.66%
12 Mo LIBOR 0.76%
Swap Rates
3 Year 0.258%
5 Year 0.355%
10 Year 0.642%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
May 19 Housing Starts Apr 950k 923k 1216k
May 19 Housing Starts MoM Apr -21.9% -24.1% -22.3%
May 19 Building Permits Apr 1000k 1000k 1350k
May 19 Building Permits MoM Apr -25.9% -25.9% -7.0%
May 20 FOMC Meeting Minutes Apr 29 NA NA NA
May 21 Philly Fed Business Optimism May -40.0 -40.0 -56.6
May 21 Initial Jobless Claims May 16 2450k 2425k 2981k
May 21 Leading Index Apr -5.6% -5.7% -6.7%
May 21 Existing Home Sales MoM Apr -18.4% -18.4% -8.5%

calendar icon Top 5 Events for the Week

May 18 — 22, 2020

1. Coronavirus/Reopening Developments — All Week    
2. Congressional Actions — All Week
3. Fed Speak and FOMC Minutes — Tuesday/Wednesday
4. April Housing Activity — Tuesday/Thursday
5. Leading Index — Thursday

 

1.  Coronavirus/Reopening Developments — All Week

Much like the last several weeks, trading will once again be focused on assessing the status of the partial reopenings in various states and localities and any news on the virus front. As for the latter, some positive news from a phase 1 vaccine trial is contributing a risk-on mood as we open the week.  Last week, equity markets took a breather from their recent rally, trading lower three out of five days, but the losses were relatively modest (646 Dow points). Treasuries, as has been their want lately, were strongly bid all week with the 10yr note yield dropping 6bps during the week from 0.70% to 0.64% (it sits at 0.66% this morning). The April retail sales numbers were every bit as gruesome as the jobs report the week before but equities continued to mostly look past the wreckage. Prior to last week, equities seemed to be pricing for a V-shaped bounce but some somber testimony by Dr. Fauci, and perhaps the degree of damage being illuminated in the stream of April economic reports were too much to ignore, leading to a dip in equity enthusiasm and that contributed to another strong week in Treasuries.

 

2.  Congressional Actions – All Week

In a partisan show of force, House Democrats passed a $3 trillion aid package that provides relief to states and cities, more checks to taxpayers and extension of unemployment benefits. The measure was approved on a mostly party line vote. The Senate, however, led by Majority Leader Mitch McConnell has no intention of taking up the House-approved bill, but it will force the  Senate to begin the process of considering its own aid package to states and cities. Speculation has it that $1 trillion allocated to states and cities may garner enough Republican support in the Senate to pass while the other House-approved measures are delayed pending the assessment over how well reopening economies are performing.  We mentioned last week, that this latest stimulus package would be the next political football and we are correct. Even with the admonition of Fed Chair Powell last week that more fiscal spending is needed, another stimulus bill looks like it will be a grinding affair. 

 

3.  Fed Speak and FOMC Minutes — Tuesday/Wednesday

Speaking of Fed Chair Powell, he’ll be testifying to the Senate Banking Committee tomorrow along with Treasury Secretary Mnuchin. You can bet both will be asked whether more fiscal stimulus spending is needed and Powell, at least, is likely to reiterate his comments from last week that while the Fed can lend money, it can’t spend it and that’s what is needed at the present time. Also, with state budgets facing massive shortfalls, and no currency printing press to make up the difference, unless an aid package gets to the states and soon, another wave of state and city layoffs and other budget cuts will only add to the economic misery. We expect that a package aiding the states will get passed but whether it happens this week is anyone’s guess.

 

4.  April Housing Activity — Tuesday/Thursday

While economic releases from April are getting only glancing looks from the market, this week brings us some housing activity numbers for the month and they are expected to be as lousy as the other April releases. Tomorrow, housing starts and permits are expected to reflect the induced coma that most of the economy was put under via home quarantines. Housing starts are expected to be down –24.1% for the month to 923 thousand annualized which will be the lowest since 2015. Meanwhile, on Thursday existing home sales—accounting for 90% of the residential market—are expected to be down –18.4% to 4.30 million houses sold on an annualized basis. That would be the lowest monthly sales since 2011.

 

Core and Overall CPI

 

5.  Leading Index — Thursday

The Leading Index had been flirting with the zero-level, indicating increasing risk of recession, for the last year but the collapse of economic activity and increase in joblessness since February has sent the index to depths it hasn’t ever experienced, even the Great Recession more than 10 years ago.  The index is expected to print a –5.7% for April versus a –6.7% in March as equity gains hold up the index, but it’s still expected to be near the March record-breaking low. The prior low record was –3.4% set in October 2008.

 

 


bar graph icon  Yield Universe

 Yield/Duration Relationship 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

Download / Print as a PDF