Over and Done

Our planet, third rock from the sun
Has had a remarkable run
For ten years, at least
No famine, just feast
But now that streak’s over and done

The IMF said, yesterday
This year will see growth go away
For ‘Twenty, it’s clear
While next year they fear
A second wave, growth will delay

Fear was the order of the day yesterday amid several related stories. Headlines continue to highlight the resurgence in reported Covid cases in the US, notably in those states that have begun to reopen more aggressively. So, California, Texas and Florida have all seen a big jump in infections which many are saying requires a second lockdown. While no orders of that nature have yet been issued, it is clear there is a risk they will be deemed necessary. That would be quite the body blow to the US economy, as well as to the equity markets which are pretty clearly pricing in that elusive V-shaped recovery. If we see second order lockdowns, you can be pretty confident that the equity market will suffer significantly. Simply consider yesterday’s performance, with the three US indices all falling at least 2.2% without having to deal with any actual change in regulations.

Adding insult to injury was the IMF, which released its updated global GDP forecasts and is now looking for a more severe global recession with growth falling 4.9% in 2020. That is down from the -3.0% expectation in April. As well, they reduced their forecasts for 2021, albeit not as dramatically, to +5.4%, down 0.4% from the April forecasts. However, they warned that should a second wave manifest itself, 2021 could see essentially zero growth globally as unemployment worldwide explodes and poverty levels in the emerging markets explodes with it. In other words, they don’t really think we are out of the woods yet.

With that one-two punch, it is no surprise that we saw risk jettisoned yesterday as not only did equity markets suffer, but we saw demand for bonds (Treasury yields -4bps yesterday and another 1.5bps this morning) while the dollar saw broad-based demand, with the DXY rising 0.6% on the day. If nothing else, this is strong evidence that all markets are anticipating quite a strong recovery, and that anything that may disrupt that process is going to have a negative impact on risk asset prices.

Adding to the fun yesterday was oil’s 6% decline on data showing inventories growing more than expected, which of course means that demand remains lackluster. Certainly, I know that while I used to fill up the tank of my car every week, I have done so only once in the past three months! While that is good for my budget, it is not helping support economic activity.

The point is, the risk asset rally has been built on shaky foundations. Equity fundamentals like revenues and earnings are (likely) in the process of bottoming out, but the rally is based on expectations of a V. Every data point that indicates the V is actually a U or a W or, worst of all, an L, will add pressure on the bulls to continue to act solely because the Fed keeps purchasing assets. History has shown that at some point, that will not be enough, and a more thorough repricing of risk assets will occur. Part of that process will almost certainly be a very sharp USD rally, which is, of course, what matters in the context of this note.

Looking at how today’s session has evolved shows that Asian equity markets had a down session, with the Nikkei taking its cues from the US and falling 1.2%, and Australia suffering even more, down 2.5%. China and Hong Kong were closed while they celebrated Dragon Boat Day. European bourses are in the green this morning, but just barely, with the average gain just 0.15% at this hour following yesterday’s 1.3%-2.0% declines. And US futures have turned lower at this time after spending much of the overnight session in the green.

As mentioned, bond markets are rallying with yields falling correspondingly, while the dollar continues to climb even after yesterday’s broad-based strength. So, in the G10 space, the euro is today’s worst performer, down 0.4%, amid overall growing concerns of a slower rebound. While the German GfK Consumer Confidence survey printed better than expected (-9.6), it was still the second worst print in the series history after last month’s. Aside from the euro, perhaps the most interesting thing is that both CHF and JPY have fallen 0.2%, despite the demand for havens. There is no news from either nation that might hint at why these currencies are underperforming from their general risk stance, but as I wrote last week, it may well be that the demand for dollars is leading the global markets these days, rather than acting as a relief valve like usual.

Emerging market currencies are seeing a more broad-based decline, simply following on yesterday’s price action. I cannot ignore the 3.6% fall in BRL yesterday, as the Covid situation grows increasingly out of control there. While the market has not opened there yet, indications are that the real’s decline will continue. Meanwhile, today’s worst performer is HUF, down 1.3%, although here, too, there is no obvious catalyst for the decline other than the dollar’s strength. Now, from its weakest point in April, HUF had managed to rally nearly 12% through the beginning of the month but has given back 5.3% of that since. On a fundamental basis, HUF is highly reliant on the Eurozone economies performing well as so much of their economic activity is generated directly on the back of Europe. Worries over the Eurozone’s trajectory will naturally hit all of the CE4. And that is true today with CZK (-0.7%) and PLN (-0.55%) also amongst the worst performers. APAC currencies suffered overnight, but not to the extent we are seeing this morning, and LATAM seems set to pick up where yesterday’s declines left off.

On the data front, this morning brings the bulk of the week’s important data. Initial Claims (exp 1.32M) and Continuing Claims (20.0M) remain critical data points in the market’s collective eyes. Anything that indicates the employment situation is not getting better will have a direct, and swift, negative impact on risk assets. We also see Durable Goods (10.5%, 2.1% ex transport) and the second revision of Q1 GDP (-5.0%). One other lesser data point that might get noticed is Retail Inventories (-2.8%) which has been falling after a sharp rise in March, but if it starts to rise again may also be a red flag toward future growth.

Two more Fed speakers are on the docket, Kaplan and Bostic, but there is nothing new coming from the Fed unless they announce a new program, and that will only come from the Chairman. So, at this stage, I see no reason to focus on those speeches. Instead, lacking an exogenous catalyst, like another Fed announcement (buying stocks maybe?) it feels like risk will remain on the defensive for the day.

Good luck and stay safe
Adf

 

Dire Straits

In Europe, that grouping of states
Now find themselves in dire straits
The PMI data
Described a schemata
Of weakness and endless low rates

In the past, economists and analysts would build big econometric models with multiple variables and then, as new data was released, those models would spit out new estimates of economic activity. All of these models were based on calculating the historic relationships between specific variables and broader growth outcomes. Generally speaking, they were pretty lousy. Some would seem to work for a time, but the evolution of the economy was far faster than the changes made in the models, so they would fall out of synch. And that was before Covid-19 pushed the pace of economic change to an entirely new level. So now, higher frequency data does a far better job of giving indications as to the economic situation around the world. This is why the Initial Claims data (due this morning and currently expected at 4.5M) has gained in the eyes of both investors and economists compared to the previous champ, Nonfarm Payrolls. The latter is simply old news by the time it is released.

There is, however, another type of data that is seen as quite timely, the survey data. Specifically, PMI data is seen as an excellent harbinger of future activity, with a much stronger track record of successfully describing inflection points in the economy. And that’s what makes this morning’s report so disheartening. Remember, the PMI question simply asks each respondent whether activity is better, the same or worse than the previous month. They then subtract the percentage of worse from the percentage of better and, voila, PMI. With that in mind, this morning’s PMI results were spectacularly awful.

Country Manufacturing Services Composite
France 31.5 10.4 11.2
Germany 34.4 15.9 17.1
UK 32.9 12.3 12.9
Eurozone 33.6 11.7 13.5

Source: Bloomberg

In each case, the data set new historic lows, and given the service-oriented nature of developed economies, it cannot be that surprising that the Services number fell to levels far lower than manufacturing. After all, social distancing is essentially about stopping the provision of individual services. But still, if you do the math, in France 94.8% of Service businesses said that things were worse in April than in March. That’s a staggering number, and across the entire continent, even worse than the dire predictions that had been made ahead of the release.

With this in mind, two things make more sense. First, the euro is under pressure this morning, falling 0.6% as I type and heading back toward the lows seen last month. Despite all the discussion of how the Fed’s much more significant policy ease will ultimately undermine the dollar, the short-term reality continues to be, the euro has much bigger fundamental problems and so is far less attractive. The other thing is the ECB’s announcement last evening that they were following the Fed’s example and would now be accepting junk bonds as collateral, as long as those bonds were investment grade as of April 7. This is an attempt to prevent Italian debt, currently rated BBB with a negative outlook, from being removed from the acceptable collateral list when if Standard & Poor’s downgrades them to junk tomorrow. Italian yields currently trade at a 242bp premium to German yields in the 10-year bucket, and if they rise much further, it will simply call into question the best efforts of PM Conte to try to support the Italian economy. After all, unlike the US, Italy cannot print unlimited euros to fund themselves.

Keeping all that happy news in mind, market performance this morning is actually a lot better than you might expect. Equities in Asian markets were mixed with the Nikkei up nicely, +1.5%, but Shanghai slipping a bit, -0.2%. Another problem in Asia is Singapore, where early accolades about preventing the spread of Covid-19 have fallen by the wayside as the infection rate there spikes and previous efforts to reopen the economy are halted or reversed. Interestingly, the Asian PMI data was relatively much better than Europe, with Japanese Services data at 22.8. Turning to Europe, the picture remains mixed with the DAX (-0.3%) and FTSE 100 (-0.3%) slipping while the CAC (+0.1%) has managed to keep its head above water. The best performer on the Continent is Italy (+1.0%) as the ECB decision is seen as a win for all Italian markets. US futures markets are modestly negative at this time, but just 0.2% or so, thus it is hard to get a sense of the opening.

Bond markets are also having a mixed day, with the weakest links in Europe, the PIGS, all rallying smartly with yields lower by between 5bps (Italy) and 19bps (Greece). Treasury yields, however, have actually edged higher by a basis point, though still yield just 0.63%. And finally, the dollar, too, is having a mixed session. In the G10 bloc, the euro and Swiss franc are at the bottom of the list today, with Switzerland inextricably tied to the Eurozone and its foibles. On the plus side, NOK has jumped 1.0% as oil prices, after their early week collapse, are actually rebounding nicely this morning with WTI higher by 12.4% ($1.70/bbl), although still at just $15.50/bbl. Aussie (+0.6%) and Kiwi (+0.75%) are also in the green, as both have seen sharp recent declines moderate.

EMG currencies also present a mixed picture, with the ruble on top of the charts, +1.4%, on the strength of the oil market rebound. India’s rupee has also performed well overnight, rising 0.8%, as the market anticipates further monetary support from the Reserve bank there. While there are other gainers, none of the movement is significant. On the other side of the ledger, the CE4 are all under pressure, tracking the euro’s decline with the lot of them down between 0.3% and 0.5%. I must mention BRL as well, which while it hasn’t opened yet today, fell 2.6% yesterday as the market responded to BCB President Campos Neto indicating that further rate cuts were coming and that QE in the future is entirely realistic. The BRL carry trade has been devastated with the short-term Selic rate now sitting at 3.75%, and clearly with room to fall.

Aside from this morning’s Initial Claims data, we see Continuing Claims (exp 16.74M), which run at a one week lag, and then we get US PMI data (Mfg 35.0, Services 30.0) at 9:45. Finally at 10:00 comes New Home Sales, which are forecast to have declined by 16% in March to 644K.

The big picture remains that economic activity is still slowing down around the world with the reopening of economies still highly uncertain in terms of timing. Equity markets have been remarkable in their ability to ignore what have been historically awful economic outcomes, but at some point, I fear that the next leg lower will be coming. As to the dollar, it remains the haven of choice, and so is likely to remain well bid overall for the foreseeable future.

Good luck and stay safe
Adf

 

New Aspirations

In Europe, the largest of nations
Has made clear its new aspirations
As Covid now peaks
In less than three weeks
Some schools can return from vacations

Despite less than stellar results from other countries that have started to reopen their economies (Japan, Singapore, South Korea) after the worst of the virus seemed to have passed, Germany has announced that by May 4, they expect to begin reopening secondary schools as well as small retail shops, those less than 800 square meters in size. This is a perfect example of the competing pressures on national leaders between potential health outcomes and worsening economic conditions.

The economic damage to the global economy has clearly been extraordinary, and we are just beginning to see the data that is proving this out. For instance, yesterday’s US Retail Sales data fell 8.7%, a record decline, while the Empire Manufacturing result was a staggering -78.2. To better understand just what this means, the construction of the number is as follows: % of surveyed companies reporting improving conditions (6.8%) less % of surveyed companies reporting worsening conditions (85%). That result was far and away the worst in the history of the series and more than double the previous nadir during the GFC. We also saw IP and Capacity Utilization in the US decline sharply, although they did not achieve record lows…yet.

Interestingly, we have not yet seen most of the March data from other countries as they take a bit longer to compile the information, but if the US is any indication, and arguably it will be, look for record declines in activity around the world. In fact, the IMF is now forecasting an actual shrinkage of global GDP in 2020, not merely a reduction in the pace of growth. In and of itself, that is a remarkable outcome.

And yet, the question with which each national leader must grapple is, what will be the increased loss of life if we get back to business too soon? Once again, I will remind everyone that there is no ‘right’ answer here, and that these life and death tradeoffs are strictly the purview of government leadership. I don’t envy them their predicament. In the meantime, markets continue to try to determine the most likely path of action and the ultimate outcome. Unfortunately for the market set, the unprecedented nature of this government activity renders virtually all forecasting based on historical information and data irrelevant.

This should remind all corporate risk managers that the purpose of a hedging program is to mitigate the changes in results, not to eliminate them. It is also a cogent lesson in the need to have a robust hedging program in place. After all, hedge ineffectiveness is not likely to be a major part of earnings compared to the extraordinary disruption currently underway. Yet a robust hedging program has always been a hallmark of strong financial risk management.

In the meantime, as we survey markets this morning, here is what is happening. After yesterday’s weak US equity performance, Asia was under pressure, albeit not aggressively so with the Nikkei (-1.3%) and Hang Seng (-0.6%) falling while Shanghai (+0.3%) actually managed a small gain. European bourses are mostly positive this morning, but the moves are modest compared to recent activity with the DAX (+1.0%), CAC (+0.6%) and FTSE 100 (+0.4%) all green. And US futures are pointing higher, although all three indices are looking at gains well less than 1.0%.

Bond markets have been similarly uninteresting, with 10-year Treasury yields virtually unchanged this morning, although this was after a near 12bp decline yesterday. German bunds, too are little changed, with yields higher by 1bp, but the standout mover today has been Italy, where 10-year BTP’s have seen yields decline 14bps as hope permeates the market after the lowest number of new Covid infections in more than a month were reported yesterday, a still high 2.667.

Turning to the FX market, despite what appears to be a generally more positive framework in markets, the dollar continues to be the place to be. In the G10 space, only SEK is stronger this morning, having rallied 0.25% on literally no news, but the rest of the bloc is softer by between 0.15% and 0.3%. So, granted, the movement is not large, but the direction remains the same. Ultimately, the global dollar liquidity shortage, while somewhat mitigated by Federal Reserve actions, remains a key feature of every market.

Meanwhile, in the EMG bloc, we have seen two noteworthy gainers, RUB (+1.0%) and ZAR (+0.5%). The former is responding to oil’s modest bounce this morning, with prices there up about 2.0%, while the latter is the beneficiary of international investor inflows in the hunt for yield. After all, South African 10-year bonds yield 10.5% these days, a whole lot more than most other places! But, for the rest of the bloc, it is business as usual, which these days means declines vs. the dollar. Remarkably, despite oil’s rebound, the Mexican peso remains under pressure, down 0.6% this morning. But it is KRW (-0.95%) and MYR (-0.85%) that have been the worst performers today. The won appears to have suffered on the back of yesterday’s weak US equity market/risk-off sentiment, with the market there closing before things started to turn, while Malaysia was responding to yesterday’s weakness in oil prices. Arguably, we can look for both of these currencies to recoup some of last night’s losses tonight.

On the data front, this morning brings the latest Initial Claims number (exp 5.5M) as well as Housing Starts (1300K), Building Permits (1300K) and Philly Fed (-32.0). I don’t think housing data is of much interest these days, but the claims data will be closely scrutinized to see if the dramatic changes are ebbing or are still going full force. I fear the latter. Meanwhile, after yesterday’s Empire number, I expect the Philly number to be equally awful.

As much as we all want this to be over, we are not yet out of the woods, not even close. And over the next month, we are going to see increasingly worse data reports, as well as corporate earnings numbers that are likely to be abysmal as well. The point is, the market is aware of these things, so inflection in the trajectory of data is going to be critical, not so much the raw number. For now, the trend remains weaker data and a stronger dollar. Hopefully, sooner, rather than later, we will see that change.

Good luck and stay safe
Adf

Just an Illusion

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
Adf

Woe Betide Every Forecast

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.

Tuesday JOLTS Job Openings 6.5M
Wednesday FOMC Minutes  
Thursday Initial Claims 5000K
  PPI -0.4% (0.5% Y/Y)
  -ex food & energy 0.0% (1.2% Y/Y)
  Michigan Sentiment 75.0
Friday CPI -0.3% (1.6% Y/Y)
  -ex food & energy 0.1% (2.3% Y/Y)

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
Adf