Reopening Plan and Promising Drug Treatment Create Risk-On Tone
Yesterday, the SBA PPP loan program reached its initial limit with $349 billion in loans approved. Meanwhile, the political wrangling over the next tranche of funding goes on. Both parties want to add $250 billion to the program but they have been sparring over whether to add loan restrictions as well as funding for other programs. Democrats want to expand access to the loans as well as include more money for hospitals, food assistance and state and local governments. Republicans want to keep the bill focused on increasing small-business aid and defer other funding debates until the next, broader legislation is crafted. Meanwhile, the Trump administration unveiled a three-step plan to reopen parts of the economy by the end of this month, or early May. The initial response is creating a risk-on market tone (along with positive results in a small test trial using a Gilead drug treatment). The reopening plan, however, is appropriately state-driven and is open-ended as to a time table. We note too the experience other countries have had attempting to reopen being confronted with a spike in new cases (more on that below). So, the prudent course seems to be proceed cautiously so as to not undo hard won gains.
The previously pedestrian Weekly Jobless Claims Series has quickly become the best real-time indicator of the economic fallout being meted out by social distancing and shelter-in-place orders. In the week ending April 11, 5.245 million people filed jobless claims, down from 6.615 million the prior week, and below the consensus guestimate of 5.5 million. The report also showed that the seasonally adjusted insured unemployment rate increased to 8.2% in the week ended April 4, the highest in the history of the series. Comparing that insured unemployment rate to the more famous unemployment rate from the monthly jobs report implies a 16% unemployment rate. Also, the 22 million in claims during the past month wiping out a decade of job gains.
Don’t let the slight decline in claims versus the prior week lull you into thinking the worst is over. Problems with many states computer systems are slowing the intake and processing of claims. Most acutely, the CARES Act has provided that previously uncovered gig-economy workers are now insured but that entails computer coding changes that are proving hard to do with many archaic state systems. Expect this series to continue to print near 5 million for a couple more weeks to clear the claims backlog and that in itself will eventually lead to a nearly 20% unemployment rate in the monthly employment report.
This has been the week when everybody seems to be thinking about reopening the economy. The President is certainly talking about it as are governors. Leaders in Europe are talking as well with Germany expected to roll out a limited reopening beginning next week. With weekly jobless claims hitting 5 million or more on a weekly basis, and other economic releases starting to reflect the horrific consequences of putting the economy into a deep freeze, it’s no wonder talk of reopening is gathering momentum.
But before getting too excited about the economic prospects of reopening it’s worth taking a look at what’s happening in Singapore, which had been celebrated as a model response to the virus. Singapore’s initial approach was aggressive. In January when the virus was still isolated in Wuhan, Singapore officials began screening all arriving travelers and quarantining any who tested positive. They also tested residents extensively and did contact tracing for those testing positive. The result was only 10 deaths out of a population of 5.6 million, despite the country’s close ties with China. Thanks to the response, Singapore avoided the type of lockdowns prevalent in the U.S., with schools and restaurants remaining open but with distancing measures followed.
Alas, Singapore doesn’t look that way anymore. Even with all the successful containment measures, the virus never disappeared and now an outbreak is underway. The number of new cases has surged from practically none in mid-March to more than 700 per day now. The city-state provides a good example when we start looking at our urban areas. As those crowded areas move to reopen we can expect outbreaks and hotspots to develop. Responding quickly with widespread testing and contact tracing will limit outbreaks. Standing up that testing and tracing capability remains a challenge. While some hope has developed with a drug treatment, until a vaccine is developed responding to outbreaks will be the new reality. All that seems to imply that an economic recovery will be more fitful and drawn out over the next year while a V-shaped bounce seems more wishful thinking.
30Yr MBS Yield Spreads Settle into Six-Year Highs
We thought we would check back into the MBS market today and the yield spread of the FNMA 30yr current coupon MBS versus a 5yr/10yr Treasury blend that closely mimics the duration the mortgage security. The spread spiked violently during the Fed’s rapid series of emergency rate cuts as well as the potential impact from widespread closure of the economy. The Fed’s unlimited QE announcement sent spreads tightening, especially when they started buying MBS in size making good on their unlimited QE pledge. As shown, however, spreads have quietly risen back to 2014 levels. So, while absolute yields are mind-numbingly low, spreads on 30yr MBS product are about as good as they’ve been over the last six years.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.12%||-0.07%||1 Mo LIBOR||0.75%||-0.07%||FF Target Rate||0.00%-0.25%||3 Year||0.403%|
|6 Month||0.16%||-0.06%||2 Mo LIBOR||1.35%||+0.04%||Prime Rate||3.25%||5 Year||0.479%|
|2 Year||0.20%||-0.03%||6 Mo LIBOR||1.15%||-0.08%||IOER||0.10%||10 Year||0.709%|
|10 Year||0.63%||-0.09%||12 Mo LIBOR||1.01%||-0.04%||SOFR||0.03%|