It seems there’s a bit of confusion
‘Bout whether this time of seclusion
Will actually end
The virus’ growth trend
Or if this is just an illusion
Markets have a less certain feel about them this morning than we have seen the past several days. Consider, despite continuing increases in both deaths and the caseload in the hardest hit areas, risk has been gathered up pretty aggressively. I realize that the narrative that is trying to be told is that we have passed the peak of infections and that with a little perseverance regarding all the shelter-in-place orders, we can expect the virtual halt in the global economy to end. The problem with this narrative is that the earliest infection sites in Asia; China, South Korea, Hong Kong, Singapore and Japan, have recently seen the infection data turn higher again. At the same time, we continue to hear of daily increases in the fatality count in Spain, Italy, Germany, the UK and New York, with all of those places considering extensions of their lockdowns.
And yet, US and European stock markets are higher by between 8% and 12% so far this week. I continue to be confused by this price action as it appears to imply that investors expect companies to simply pick up where they left off before the lockdowns and disruption began. The problem with that view is it appears to be complete fantasy. Consider, this morning we are going to get our third consecutive Initial Claims number that prints in the millions. Prior to two weeks ago, the largest single data point ever in the series was 695K. The median expectation on Bloomberg this morning is for 5.5M with the range of estimates 2.5M and 7.5M. The thing is, this number has the potential to be much higher than that. In fact, it would not surprise me if we saw a 10.0M print. One of the biggest problems that has consistently been reported is that most states’ employment systems have not been able to handle the crush of applications, although they have been working feverishly to catch up. Add to that the fact that over the past week we have heard an increasing number of states declare that more and more non-essential businesses need to close down for the remainder of the month, while more and more large companies are furloughing employees and only covering health care costs. Prior to the onset of the pandemic, the workforce in the US numbered about 178 million. If 25% of the economy has been shuttered, and I think that is a conservative estimate, that implies some 44 million people will eventually be applying for unemployment insurance. Three plus weeks into this process, we have only heard about 10 million. I fear there are many more to come, so don’t be surprised if today’s number is MUCH higher.
Continuing along this premise, if the claims data turns out to be much worse than expected, will that unravel the narrative that the worst is behind us? Or in fact, will markets begin to understand that even when the infection is well past its peak, economic activity will take a long time to recover. There is a great deal of discussion right now about what shape the recovery will take later this year and next. The first big assumption is that the recovery will start in Q3, which seems brave given we still don’t have an accurate representation of Covid-19’s actual pathology. But let’s work with that assumption. The bulk of the debate is whether the recovery will chart like a ‘V’ or a ‘U’. However, the more pessimistic discuss a ‘W’ or even an ‘L’. Alas, I fear we may see a ‘Harry Potter’ recovery, one that looks more like
We will learn much in a short while. However, until then, let’s take a look at the markets this morning, where the dollar remains under pressure, akin to yesterday, yet government bonds are rallying and equity markets are having a mixed performance. Aside from the Claims data, all eyes are on the tape to see what comes out of the OPEC+ meeting and whether or not they can agree on significant production cuts to help stem the extraordinary build-up in stored oil. Oil traders remain quite bullish as we are seeing Brent crude futures higher by 4.1% and WTI higher by 6.7%. That is clearly helping support the narrative that the worst is behind us. But even if they manage to agree to the mooted 10 million barrel/day production cut, will that be enough to stem the tide? Estimated usage prior to the current situation was 93 million barrels/day, so this represents a nearly 11% production cut. But again, if I go back to my 25% decline in activity, that still means there is a lot of surplus oil being pumped with fewer and fewer places to put it. This price move has all the earmarks of a buy the rumor situation. Just watch out upon the news of an agreement. And especially be careful if they cannot agree production cuts, which is likely to be a significant market negative.
Turning to FX markets, in the G10 space, NOK is the leader today, rallying 0.5% on the back of oil’s gains, and we also see the pound rallying this morning, up 0.4%, after the BOE changed its mind and explained it would be monetizing UK debt, thus expanding the government’s ability to increase stimulus. Meanwhile, a few currencies, CAD, NZD, are a bit softer, but the movement is so small as to be meaningless. Looking at the EMG bloc, IDR is today’s champ, rising 2.3%, after the government issued 50-year dollar bonds and laid out its path to help finance extraordinary stimulus. The rupiah has been under significant pressure since the beginning of March, having fallen nearly 13% before today’s rebound. Allegedly the fundamentals show the currency is still too cheap, but markets may have another take. Beyond the rupiah, RUB has rallied 1.4% on the strength of oil, while HUF and CZK are both higher by a bit more than 1.0% as both currencies seem to be benefitting from large bond financings. However, with the Easter holiday upcoming, there were a number of markets closed last night and we will see many closed tomorrow as well, so price action has been somewhat muted.
On the data front, along with Initial Claims, we see PPI (exp 1.2%, 1.3% ex food & energy), as well as Michigan Sentiment (75.0). However, it is all about the Claims data today. My expectation is that if the print is within the range of expectations, that will not derail the recent equity strength, but if we come out on the high side, especially with Good Friday tomorrow and US equity markets closed, we could easily see a significant risk-off outcome by the end of the day.
Good luck and stay safe