It's not hard to remember the first time that I ever stepped onto the trading floor at the New York Stock Exchange. The year was 1983, I was just someone else's guest that day. It would still be a few years before I would accept a full-time position working on that floor, but I knew immediately where I belonged. The size of the rooms, the noise, the paper on the floor. How do all these traders know what they are doing? Such bustle. Such hustle. It was wonderful.
Intercontinental Exchange (ICE) , the parent company of the NYSE, announced that the iconic physical trading floor in downtown New York City would temporarily close as of Monday, March 23rd after two individuals tested positive for the Covid-19. Trading in NYSE-listed securities will now move to a fully electronic model for the time being. I do not think that the majority of readers will notice a difference. Both individuals failed to get past the screening process implemented at the Exchange this week, and were tested. One individual is an NYSE employee, the other a member of the trading floor community. Both were last in the building on Friday, March 13.
Used to it yet? I have found over many years that one never really does ever get used to a market in correction, and this one to be honest is for the ages. This correction is not just being driven by a need to revalue equities, but by a nearly complete halt to activity across entire industries, coinciding with drastic changes in others. This has in turn caused various corners of the financial environment, corners that usually hardly even merit mention, to require aggressive action to be taken, as there has been an incredible run into cash, but not just any cash, risk-off cash. That's the U.S. dollar.
For those interested, the pressure on stocks has not let up in the least. Trading volume in aggregate for S&P 500 member names landed well above its own 50-day simple moving average on Wednesday. Again. In fact, as gigantic moves in percentage terms seem to occur on an almost daily basis, this measure of trading volume has not printed below that 50-day SMA since February 19, a month ago today.
These investors have now pushed the S&P 500 down below the lows of December 2018, while also selling the long end of the Treasury curve in anticipation of what will have to be tremendous issuance at a time when revenue will suddenly be scant. It would appear that beyond cash, the only thing that investors are willing to place any trust in at all is the very short end of that yield curve. In fact, the yield for three month T-Bills did cross in and out of negative territory several times overnight.
The Federal Reserve Bank felt it necessary to take action yet again, as this week has required one move after another to make sure that short-term liquidity needs are met. Overnight, news broke that the Fed would move to backstop money-market mutual funds, as Crane has reported (and I read in the Wall Street Journal) an aggregate $66 billion has been withdrawn from this kind of fund over the past week.
This function, which will be known as the Money Market Mutual Fund Liquidity Facility, will provide loans to eligible institutions to be backed by high-quality assets. This facility comes on the heels of a number of interest rate reductions, the return of quantitative easing in earnest, a facility aimed at backstopping the market for commercial paper, and another meant to backstop primary bond dealers. What's left at this point? Without moving onto the purchase of corporate securities, which the Fed cannot do on its own authority, the dry powder is in the size of these facilities. All can be increased upon need. Let's hope the need calms at some point.
On that note, the European Central Bank, on Wednesday evening unveiled the Pandemic Emergency Purchase Programme. What that means is that the ECB will purchase Eu750 more than planned in both sovereign and corporate debt in response to worsening economic conditions due to the spread of the coronavirus. The new program is expected to last until the crisis is judged to have passed.
When It Is Over
Almost fantastical to think about. We all want to think about the wonders of congregating at houses of worship, at sporting events, at concerts... or maybe just going out to eat with family and not wondering what lurks just a table away, or what's handling the food. Those days will come. The human race is resilient. That I know.
What I don't know, and it is hard to envision, is just what returns to normal, and what never can. After we, as a people, depend on the government to this degree, what will the Fed's balance sheet look like on that sunny day? What will the national debt load be? Right now, money is no object, and that's how it should be. Jobs are being lost. The ability to meet obligations is being tested at the household, small business, and even corporate levels. I am sure that those of us who have always studied both monetary and fiscal policy will do so again. Let's keep in context, once we think that we are physically safer, what these policy makers were up against when we do get there.
As for society at large, can there be any doubt that a less globalized world with less globalized supply chains would have weathered a dangerous pandemic far better. I understand the push for margin, and corporate performance. I understand a yearning to travel to places that your parents and grandparents only read about. That said, in a slower, more compartmentalized world, containment naturally slows the spread of anything.
Imagine how much slower this pandemic would have moved if U.S. (or any nation's) companies had always maintained national supply lines, and always utilized a domestic supply of labor. Imagine if individual travel had been less adventurous. The Poconos as opposed to Fiji. I cast no blame, nor do I judge, but now we do know that a rampant infection can get out of control globally. When the U.S. and the world rebuild, and they will, there can be no foolishness in the name of earnings per share. There has to be a method created where should something awful happen in one part of the world, awfulness can be close to contained, and then the far-less-impacted nations can contribute toward solving problems for those areas impacted. We can never go back to the way things were. Not exactly, anyway. We have to be smarter.
The good news? The U.S. Senate passed and the president signed into law on late Wednesday a $100 billion paid-leave bill, that comes after the $8.3 billion emergency spending bill that had already been enacted. Now comes the hard part?
Our legislature must now consider a $1T+ fiscal package that will likely include immediate relief for badly impacted industries such as the airlines, as well as direct payments to American households, that at this time look like they may be sent out by the Treasury Department in two tranches.
The negative here, and it may be a very big negative, is that two members of the House of Representatives tested positive for Covid-19 on Wednesday. The two would be Rep. Mario Diaz-Balart (R-Fla), and Rep. Ben McAdams (D-Utah). The question for me would be just how does the House or even the Senate still meet in person? Does a need for our legislature to distance themselves from one another slow down their very necessary work at this time? My guess is that we hear more on this soon.
The markets will likely respond well in the short-term to any large injection of cash into the broad, malfunctioning economy as well as directly into troubled industries. That said, there is no way to stimulate anything beyond bill payments and the purchase of perceived necessities at this time. As there is no way to time the impact of this virus on the economy, there is little in the way of quantifying future economic and subsequently corporate performance.
Thursday's Most Important Number
From the macro side, nothing will have the ability to rattle a few cages on Thursday more so than the weekly print for Initial Jobless Claims. At last glance, economists in consensus had not expected a whole lot more than the number seen last week. My thought would be that there is little positivity that markets can take from this number. Should the print land close to consensus (which is really around 220K, I padded my own expectation below.) market participants will likely discard the number as being behind the times. Should the number come in well above expectations, it will indeed be seen as further evidence of an economy halted.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 211K.
08:30 - Personal Income (February): Expecting 0.4% m/m, Last 0.4% m/m.
08:30 - Consumer Spending (February): Expecting 0.2% m/m, Last 0.2% m/m.
08:30 - PCE Price Index (February): Expecting 1.7% y/y, Last 1.7% y/y.
08:30 - Core PCE Price Index (February): Expecting 1.6% y/y, Last 1.5% y/y.
09:45 - Chicago PMI (March): Expecting 62.2, Last 61.9.
10:00 - U of M Consumer Sentiment (March-F): Flashed 102.0.
10:30 - Natural Gas Inventories (Weekly): Expecting -73B cf, Last -86B cf.
13:00 - Baker Hughes Oil Rig Count (Weekly): Expecting 806, Last 804.
The Fed (All Times Eastern)
No Public Appearances scheduled.