Market Caught in Tug-of-War
Markets are torn right now between wanting to believe wholeheartedly in the spate of recent economic releases that point to a sharp rebound in activity versus concern over rising virus cases and all that that could mean for squashing the recovery. Yesterday, the concerned side won as Treasuries rallied and stocks suffered narrow losses. This morning, it’s just the opposite with equities indicated higher and Treasuries a bit lower in price. As for now, the market seems to be accepting a higher level of infection as long as it doesn’t overwhelm medical resources. If beds and medical staff are available, economies will remain open and activity should continue to build. But if there’s one thing we’ve learned with this virus it’s to not underestimate it. Some areas are likely to see rapid case count growth (see Florida, Texas and Arizona currently), and if it continues expect consumer behavior to be affected. For now, the tug-of-war between the two sentiments are nearly equal and that points to a continued range-bound market in bonds while equities are more optimistic and want to continue higher.
We’ve often mentioned the Leading Index in the past year as it was signaling trouble long before there was anything apparent in most economic numbers. The reason we focused on it was that in the past when it went negative and stayed there, it had an uncanny ability to predict a recession. This time, in the past year it flirted with zero but never consistently went negative. Obviously, with the economy put in lock down in March the index moved firmly through zero as shown.
The sudden and historic drop in March to a -7.5% reading improved slightly in April to –6.1%, but the rebound in May was equally as stunning as the drop in March. The 2.8% surge represents a record for the index that dates back to WWII. The index itself is comprised of 88 forward-looking indicators with some of the most consequential being: Average Hourly Workweek, Jobless Claims, ISM New Orders, Building Permits, S&P500 Stock Index, and Consumer Expectations. The rebound in stocks, the bounce in consumer confidence and manufacturing activity (discussed more in the next section) all had a hand in the bounce. Everything was pointing in the same direction for May and a V-shaped rebound is what the index produced. As we’ve mentioned before, keeping the consumer confident and factories reopening will require a sense of control over virus case counts. If the current increases continue, many of these indicators can head south taking the fragile economic rebound with it.
Manufacturing Indicators Point to V-Shaped Rebound
Last week in this space we highlighted the University of Michigan Consumer Sentiment reading and noted that the May level was better than April and the initial June reading was better than May. The 78.9 reading beat the 75.0 expectation and was up from May’s 72.3 print. Clearly the consumer is expressing increased confidence and their words were put into action as the May Retail Sales Report doubled healthy expectations and effectively erased the April nosedive in sales. Away from the consumer, the manufacturing sector is also showing signs of life. The Philly Fed Manufacturing survey reported a similar bounce in June and the bounce coincides with other recent manufacturing indices as well. The chart below tracks some of those and the V-shaped rebound is apparent. Now, if we can keep consumers shopping and factories humming through this uptick in cases it bodes well for a solid rebound in the third quarter; if not, well, kiss the V-shaped rebound goodbye.
Decline in Initial Jobless Claims Slows
The most timely look at the tenuous economic recovery has to be the Weekly Initial Jobless Claims series. We mentioned earlier that it’s one of 88 indicators in the Leading Index and certainly the decline in claims since the record 6.897 million on March 27th contributed to the rebound in that index. The latest week saw claims dip from 1.566 million to 1.508 million as the pace of firings slowed but remained stubbornly high, nonetheless. Expectations were that claims would drop to 1.209 million so it’s disappointing in that regard. So while claims continue to recede from the record high back in March, they are declining at a slower pace, and if that trend persists it points to an elevated unemployment rate well into the next year, and a Fed remaining very accommodative.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.14%||-0.02%||1 Mo LIBOR||0.19%||UNCH||FF Target Rate||0.00%-0.25%||3 Year||0.275%|
|6 Month||0.10%||-0.02%||2 Mo LIBOR||0.32%||UNCH||Prime Rate||3.25%||5 Year||0.383%|
|2 Year||0.19%||UNCH||6 Mo LIBOR||0.42%||-0.01%||IOER||0.10%||10 Year||0.708%|
|10 Year||0.73%||+0.03%||12 Mo LIBOR||0.58%||-0.07%||SOFR||0.09%|