Market Update – 4/20/2020

The Impact of COVID-19 Pandemic Rages

The continuing impact of the COVID-19 pandemic was evident across a wide-range of the U.S. economy in the latest week, as data for a variety of sectors was released.  

Like the previous three weeks, Initial Jobless Claims once again climbed into the millions, as 5.25 million people filed for unemployment during the week ending April 11. This means the 4-week tally of claims has hit a nearly unfathomable 22 million people! 

The housing sector did not fare much better as the NAHB Housing Market Index, which is a real-time read on builder confidence, saw its largest one-month drop ever. New home construction was practically stymied in March as well, with Housing Starts and Building Permits showing big declines. 

March Retail Sales were also walloped, dropping 8.7% to the lowest read ever on record, while manufacturing in the New York and Philadelphia regions also plunged, with the Philadelphia Fed Index actually hitting its lowest level in 40 years. 

Millions More Initial Jobless Claims Filed 

Initial Jobless Claims totaled 5.25 million for the week ending April 11, down slightly from the 6.6 million claims filed during the prior week. These numbers are still alarming but off the peak seen in previous weeks. 

Let’s take a moment to dive deeper into the numbers. There are 160 million people in the labor force and over the last four weeks, we have seen 22 million people file unemployment claims. Before the pandemic caused this spike in jobless claims, the unemployment rate was 3.5%, meaning that 5 million people were unemployed before the pandemic began.  

So, when we factor in the number of people who were unemployed before the pandemic with the claims filed in the last four weeks, there are around 27 million people who are now unemployed. This equates to 17% unemployment, but the reality is this number is going to continue to rise. It’s likely unemployment may exceed 20%, which we would reach if 32 million people file jobless claims. Sadly, this seems very realistic now. 

Builder Confidence and Home Construction Hit Hard 

The NAHB Housing Market Index, which is a real-time read on builder confidence, dropped a whopping 42 points to 30 in April. This was well below the shot in the dark estimate of 55 and the largest one-month drop ever! 

Note that a reading of 50 is the baseline, with a number above it signaling expansion and below signaling contraction. The index tracks three components, and all saw big declines. Current sales expectations fell 43 points to 36, sales expectations for the next six months dropped 39 points to 36, and buyer traffic dropped 43 points to 13.  

The NAHB stated the obvious, “This unprecedented drop in builder confidence is due exclusively to the coronavirus outbreak across the nation, as unemployment has skyrocketed and gaps in the supply chain have hampered construction activities.” 

Data on home construction confirms this sentiment, as Housing Starts for March plummeted 22.3% while Building Permits, which are a sign of future construction, fell almost 7%.   

Manufacturing and Retail Sales Also Plummet 

March Retail Sales dropped 8.7% to the lowest read ever on record. Not surprisingly with all the store closings, sales plunged nearly 51% at clothing stores, 20% at department stores and 27% at furniture stores. Restaurants and bars also saw a 27% drop in sales, which will likely fall even more in April as many restaurants have closed but for take-out and delivery. Auto dealers were also impacted, with a 27% plunge in sales while sales at gas stations dropped 17%. 

The manufacturing sector also felt the impact of the virus, as the Empire State Index (which measures manufacturing activity in the NY region) for April was reported at -78.2, much lower than expectations of -35. Meanwhile the Philadelphia Fed Index plunged to its lowest level in 40 years. 

Home Hack of the Week 

If your grill has sat idle all winter, get it ready for the warmer weather with these cleaning guidelines from our friends at Taste of Home. 
First, give your grill a once over. Check for rust as well as any bugs that may have nested during winter. Inspect hoses and replace any that have cracked or frayed. 
Next do a deep clean. Turn on the grill for 15 minutes, which will make it easier to brush off any leftover buildup from the grates. Instead of using a brush (which could leave small bristles that can get in your food), cut an onion in half and rub it over the warmed grates with barbecue tongs until stuck-on particles break loose. Not only will this clean your grill, it will season it as well. 
If any stuck-on grit remains, soak cooled grates in a bucket of warm, soapy water for several hours. Then use a stainless steel or manufacturer-recommended cleaner to degrease the outside of your grill and help protect it all season long. Also, take a moment to make sure all your grill tools are in working order. Replace any as needed and deep clean everything before using. 
For some extra fun, let each family member pick an item on the menu for your first grill-out. Consider hosting a virtual barbecue so friends and family can join you online with a barbecue of their own. 
What to Look for This Week  

Once again, weekly Initial Jobless Claims will be the key report to watch when it releases Thursday. If we see another week of 5 million Initial Jobless Claims filed, we will be at or near 20% unemployment. 

More housing news also follows, when Existing and New Home Sales for March will be reported on Tuesday and Thursday, respectively. Expect these figures to show sharp drops. The FHFA House Price Index will also be released, but this will be for February and will likely not show the current environment. 

Ending the week on Friday, look for Durable Goods Orders for March and Consumer Sentiment for April.  

Technical Picture 

The Fed has done a good job of stabilizing the markets, as Mortgage Bonds continue to trade sideways in a wide range between support at the 25-day Moving Average and overhead resistance at 104.656, which is the all-time closing high for Mortgage Backed Securities. At the moment, MBS are only about 60bp from this level. The 10-year is trading at 0.60% and will likely move lower towards the all-time low of 0.31%.  

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