The number of those who have passed
Is starting to slow down at last
The hope now worldwide
Is this won’t subside
But woe betide every forecast

Arguably, this morning’s most important news is the fact that the number of people succumbing to the effects of Covid-19 seems to be slowing down from the pace seen during the past several weeks. The highlights (which are not very high) showed Italy with its fewest number of deaths in more than two weeks, France with its lowest number in five days while Spain counted fewer deaths for the third day running. Stateside, New York City, which given its highest in the nation population density has been the US epicenter for the disease, saw the first decline in fatalities since the epidemic began to spread. And this is what counts as positive news these days. The world is truly a different place than it was in January.

However, as everything is relative, at least with respect to financial markets, the prospects for a slowing of the spread of the virus is certainly welcome news to investors. And they are showing it in style this morning with Asian equity markets having started things off on a positive note (Nikkei +4.25%, Hang Seng +2.2%, Australia +4.3) although mainland Chinese indices all fell about 0.6%. Europe picked up the positive vibe, and of course was the source of much positive news regarding infections, and equity markets there are up strongly across the board (DAX +4.5%, CAC +3.7%, FTSE 100 +2.1%). Finally, US equity futures are all strongly higher as I type, with all three major indices up nearly 4.0% at this hour.

The positive risk attitude is following through in the bond market, with 10-year Treasury yields now higher by 6.5bps while most European bond markets also softening with modestly higher yields. Interestingly, the commodity market has taken a different approach to the day’s news with WTI and Brent both falling a bit more than 3% while gold prices have bounced nearly 1% and are firmly above $1600/oz.

Finally, the dollar is on its back foot this morning, in a classic risk-on performance, falling against all its G10 counterparts except the yen, which is lower by 0.6%. AUD and NOK are the leading gainers, both higher by more than 1% with the former seeming to be a leveraged bet on a resumption of growth in Asia while the krone responded positively to a report that in the event of an international agreement to cut oil production, they would likely support such an action and cut output as well. While oil prices didn’t benefit from this news (it seems that there are still significant disagreements between the Saudis and Russians preventing a move on this front), the FX market saw it as a distinct positive. interestingly, the euro, which was the epicenter of today’s positive news, is virtually unchanged on the day.

EMG currencies are also broadly firmer this morning although there are a couple of exceptions. At the bottom of the list is TRY, which is lower by 0.6% after reporting a 13% rise in coronavirus cases and an increasing death toll. In what cannot be a huge surprise, given its recent horrific performance, the Mexican peso is slightly softer as well this morning, -0.2%, as not only the weakness in oil is hurting, but so, too, is the perception of a weak government response by the Mexican government with respect to the virus. But on the flipside, HUF is today’s top performer, higher by 1.0% after the central bank raised a key financing rate in an effort to halt the freefalling forint’s slide to further record lows. Since March 9, HUF had declined more than 16.5% before today’s modest rally! Beyond HUF, the rest of the space is holding its own nicely as the dollar remains under broad pressure.

Before we look ahead to this week’s modest data calendar, I think it is worth a look at Friday’s surprising NFP report. By now, you are all aware that nonfarm payrolls fell by 701K, a much larger number than expected. Those expectations were developed because the survey week was the one that included March 12, just the second week of the month, and a time that was assumed to be at least a week before the major policy changes in the US with closure of businesses and the implementation of social distancing. But apparently that was not the case. What is remarkable is that the Initial Claims numbers from the concurrent and following week gave no indication of the decline.

I think the important information from this datapoint is that Q1 growth is going to be much worse than expected, as the number indicates that things were shutting down much sooner than expected. I had created a simple GDP model which assumed a 50% decrease in economic activity for the last two weeks of the quarter and a 25% decrease for the week prior to that. and that simple model indicated that GDP in Q1 would show a -9.6% annualized decline. Obviously, the error bars around that result are huge, but it didn’t seem a crazy outcome. However, if this started a week earlier than I modeled, the model produces a result of -13.4% GDP growth in Q1. And as we review the Initial Claims numbers from the past two weeks, where nearly 10 million new applications for unemployment were filed, it is pretty clear that the data over the next month or two are going to be unprecedentedly awful. Meanwhile, none of this is going to help with the earnings process, where we are seeing announcements of 90% reductions in revenues from airlines, while entire hotel chains and restaurant chains have closed their doors completely. While markets, in general, are discounting instruments, always looking ahead some 6-9 months, it will be very difficult to look through the current fog to see the other side of this abyss. In other words, be careful.

As to this week, inflation data is the cornerstone, but given the economic transformation in March, it is not clear how useful the information will be. And anyway, the Fed has made it abundantly clear it doesn’t care about inflation anyway.

Source: Bloomberg

Overall, Initial Claims continues to be the most timely data, and the range of forecasts is between 2500K and 7000K, still a remarkably wide range and continuing to show that nobody really has any idea. But it will likely be awful, that is almost certain. Overall, it feels too soon, to me, to start discounting a return to normality, and I fear that we have not seen the worst in the data, nor the markets. Ultimately, the dollar is likely to remain THE haven of choice so keep that in mind when hedging.

Good luck and stay safe
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