Market Update – 5/11/2020

Pandemic Wreaking Havoc on Labor and Economy

The pandemic continues to impact all areas of the economy, wreaking havoc especially in the labor sector as another 2.98 million people filed for unemployment for the first time during the week ending May 9.  

Meanwhile, inflation was on the decline in April at both the consumer and wholesale levels, which was expected due to the lack of pricing pressure. Retail sales also dropped 16.4% from March to April, making it the worst report on record.  

Not surprisingly, optimism among small businesses fell in April per the National Federation of Independent Business’ index. Plans to hire and capital spending both declined from March, while future and current compensation plans were slashed in half. The bright spot was that those who expect a better economy jumped from 5% to 29%. 

Consumer Sentiment did also rise from April to May, coming in at 73.7 and above expectations, due in part to stimulus checks from the CARES act improving people’s finances, noted Richard Curtin, chief economist for the Surveys of Consumers.  

Manufacturing in the New York area improved as well from April to May but is still very weak.  

Of note in housing news, the Mortgage Bankers Association reported that as of May 3, 7.91% of mortgages are now in forbearance, up from 7.54% the prior week. 

Lastly, Fed Chair Jerome Powell gave some somber remarks on Wednesday, saying that the path ahead is uncertain and significant risk remains to our recovery. He noted that 40% of households earning under $40,000 lost their jobs in March alone and said additional relief may be needed in the near term. Powell vowed that the Fed will use all its tools to aid in our recovery, though he did say that the Fed was not considering negative rates for its benchmark Fed Funds Rate, which the Fed cut to zero in March.  

Initial Jobless Claims Remain in the Millions 

Another nearly 3 million people filed for unemployment for the first time during the week ending May 9, with Connecticut (+299K), Georgia (+241K) and Florida (+222K) reporting the biggest increases. While the total number is a decrease from the 3.17 million claims filed during the previous week, the amount was about 500,000 claims higher than anticipated. 

When we factor in the number of new claims, the number of continuing claims (which increased by about 460K to 22.8 million) and the amount of people in the labor force, we estimate that the unemployment rate is around 19.4%. And if we try to estimate how many new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be closer to 22.6% without it. 

The bottom line is that while initial jobless claims are slowing, they remain at unbelievably high levels, especially given that we were averaging 200K new weekly initial jobless claims prior to the pandemic.  

Inflation Declines in April 

As expected, inflation fell in April due to the lack of pricing pressure. April’s Consumer Price Index (CPI), which measures consumer inflation, came in at -0.8% while dropping from 1.5% to 0.3% on an annual basis. A big part of the decline was due to oil prices, which have dropped significantly. The monthly drop was the largest decline since the Great Recession in 2008 and marked the second straight monthly decrease. 

The Core reading, which strips out volatile food and energy prices, dropped by 0.4% from March to April and from 2.1% to 1.4% when compared to April of last year. 

On the wholesale level, the Producer Price Index (PPI) was down 1.3%, which was worse than the expected 0.5% decrease. PPI also moved lower from 0.7% to -1.2% year over year, which was worse than expectations. Core PPI, which strips out food and energy prices, also decreased by 0.3%, which again was worse than expectations, while the annual rate dropped from 1.4% to 0.6%. 

Retail Sales and Manufacturing Update 

Retail sales tumbled over 16% in April, worse than the 12% drop predicted and coming in as the worst report on record. While online retail sales rose 8.4%, everything else fell precipitously. 

Clothing stores were hit especially hard, showing a -78.8% plunge in sales, while sales at electronics and appliance stores (-60.6%), furniture and home furnishing stores (-58.7%) and sporting goods stores (-38%) were also impacted in a big way. Bars and restaurants also saw a -29.5% drop in sales, as did gasoline stations (-28.8%), with people on the roads less. 

The control group, which takes out autos, gasoline and building materials, showed that retail sales fell by 15.3% overall, three times the estimate. We will see how these figures change in the coming months as states begin to reopen. 

The May Empire State Manufacturing Index, which measures manufacturing activity in the New York area, rose to -48.5 from -78.2. This was better than estimates of -60 but still very weak. Of note, the 6-month outlook did recover to 29.2 from 7.0 on the obvious hopes that the situation can’t get any worse as things reopen and factories can turn the lights back on. 

Home Hack of the Week  

Many people have been eating at home more than normal in recent months, and if that’s true for you, now is a great time to inspect your fridge to make sure it’s running efficiently. Here are some simple maintenance tips to help, courtesy of our friends at Real Simple. 

Make sure seals are clean and free from food particles. Clean them once every few months using a toothbrush dipped in a solution of water and baking soda. 

Empty your ice bins once a month to prevent ice build-up and keep ice from absorbing food odors. An open box of baking soda in both the fridge and freezer will also help absorb strong odors and keep your fridge smelling fresh. Be sure to replace the water filter as soon as the sensor alerts you.  

Check that your fridge is level by placing a level on top and adjusting the feet if needed. An uneven fridge may not close properly, which can both strain the motor and cause condensation. 

Typical ideal temperatures for your fridge range from 37 to 40 degrees Fahrenheit and 0 degrees for your freezer, or check your owner’s manual for the manufacturer’s recommendation. The manual should also include instructions for vacuuming the condenser coils if they have become clogged or dusty. 

What to Look for This Week  

Housing data will dominate the headlines throughout the week, as the NAHB Housing Market Index for May releases on Monday, followed by April’s Housing Starts and Building Permits on Tuesday and Existing Home Sales on Thursday. Weekly Initial Jobless Claims remain critical to monitor when the report also releases Thursday, as usual.  

The Bond market will close early at 2:00 pm ET Friday, ahead of the Memorial Day weekend, while Stocks will be open for a full trading session. 

Technical Picture 

The Fed continues to purchase Mortgage Backed Securities in line with its goal of stabilizing the markets. MBS have been trading in the middle of a wide range between support at the 50-day Moving Average and overhead resistance at the 25-day Moving Average. While there may be some volatility within this range, it shouldn’t be too extreme until either the ceiling or floor are tested. The 10-year is trading at 0.64% and we will be watching to see if it moves lower towards the all-time low of 0.31%.  

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