Visible harm. Just getting started. Equity markets peaked in the U.S. in mid-February. Ever since, as the coronavirus that causes Covid-19 spread westward from China, the pressure grew, until by last week, most economists had become convinced that not only were the U.S. and global economies going into contraction, but had been stopped nearly in their entirety. This week, the spate of available macro-economic data-points offered little doubt that the tip of the iceberg had been reached.
February Retail Sales fell off significantly in comparison to January. March manufacturing surveys published by the regional Fed districts in New York and Philadelphia showed sudden decline. Then there was the Department of Labor's weekly report for Initial Jobless Claims. That number, up 70,000 to 281,000, left little doubt as to what lay to our front. This itself was the worst week since 2017. Most economists seem, at this point, to be (conservatively) throwing seven figure numbers around for next Thursday's print. The numbers to keep in mind going into that report would be the financial crisis high of 665,000 from early 2009, and the all-time worst print of 695,000 from October 1982.
Stability? How do we really know. We do know that the Federal Reserve Bank has stood there like a shining beacon, trying to plug holes in the system almost as quickly as they have appeared. The actions taken cannot halt an aggressive selloff anymore than they can save an economy that has been forced to seek physical shelter over financial performance. What they can do, and are doing, is to ensure that markets function. That all players have access to credit, especially short-term credit as the demand for cash, especially "risk-off" type cash, overwhelms not only domestic but global markets.
Hence, on Thursday, the selling appeared for now to at least show some signs of exhaustion. On Friday morning, though still very early, European markets have opened higher, as U.S. equity index futures trade higher as well. Japanese markets are closed for a scheduled holiday. Is that good or bad?
Simply put, markets took a breather on Thursday as central banks coordinated, Oil prices found a short-term bottom, there was some potentially positive news on the virus-treatment front, and the the Senate worked on putting forth a fiscal (stimulus may be the wrong word) support package.
Just a Bill
On Thursday evening, Senate majority leader Mitch McConnell unveiled a plan to inject more than $1 trillion directly into the U.S. economy, which, among other items, will include direct transfers of cash to American households that would be phased out for higher earners. The plan also provides funding for greatly impacted businesses as well as support for health care professionals.
Various aspects of the business side of the package will include loan guarantees for airlines as well as air cargo carriers, and an authorization for the U.S. government to take equity stakes in large, considered to be important businesses (read: employers), and $300 billion in loan guarantees for small businesses.
Understand that there still has to be agreement between the Senate Republicans, the House Democrats and the administration. Understand also, that there is indeed a sense of urgency among all parties, and at least for once there does seem to be a spirit of honest cooperation from all sides as this crisis worsens. I would expect the size of this package to be less of an issue than the speed. I think we can expect something on the president's desk by early next week. Let's hope it's even earlier. My take? Though a very large number, this package is actually on the small side relative to the losses across the corporate, small business and household levels. This, in my opinion, will be the first of a possible series of national rescue packages.
I have repeatedly backed the Fed in all of their aggressive actions to maintain liquidity across several of the U.S. economy's unheralded financial markets, the ones that only get notice when they do not work. The Fed has moved over the past few days to reduce interest rates, as well as plug holes in markets for commercial paper, and money market mutual funds, while providing funding to primary bond dealers as well as ensuring that a great number of foreign central banks have access to U.S. dollar funding.
That said, even with the likelihood of fiscal help in the short-term, even more will be required. the Fed purchased $40 billion in Treasury securities on Monday, followed by $45 billion on Tuesday. This was followed up by another $75 billion yesterday (Thursday), and we can expect to see similar aggression today (Friday). Fed watchers must remember that the quantitative easing announced on Sunday night of $500 billion in Treasuries and $200 billion in mortgage-backed securities were not limits. Yes, this is record pace QE. Yes, these levels were floors.
The Fed is going to have to give markets the impression that it has not just a big bazooka, but the biggest bazooka, even an endless bazooka. The way I see it, there are two items to consider here. One, is easy to understand. In order to force Treasury and MBS markets to behave normally, there must be perceived safety. In order to do that, investors must believe that interest rates have a cap. The Fed can either keep upping the size of these purchases or make public where they stand pat and buy "whatever it takes"... that might even draw in buyers looking to "penny" the Fed. Just an idea.
Secondly, and this will become important. States and localities are going to hit fiscal hardships themselves and soon. Some were in trouble even before a global pandemic changed our lives. Taken from Barron's, for the week ended March 18, taxable, corporate bond funds saw an aggregate withdrawal of $55.9billion, as municipal bond funds saw $12.2 billion in similar action.
Will the Fed, with proper authorization, also be called upon to monetize debt in these spaces, so that these entities can keep borrowing as they need to, as the crisis still works toward an unknowable peak? We have to keep these realities in mind.
On Wednesday, Piper Sandler analyst Tyler Van Buren made known that he expects the anti-viral Remdesivir from Gilead Sciences (GILD) to do well, or show some efficacy in the fight against the SARS-CoV-2 virus that causes Covid-19. There are currently two trials ongoing in China, one aimed patients with mild to moderate symptoms and the other targeting those with severe symptoms. Van Buren believes that if indeed this drug shows some success, it should "get approval ASAP." The president's press conference on Thursday did seem to back up Van Buren's comments.
What's interesting, going back to Van Buren's note, is that he says, "The Company doesn't expect to profit off of the ongoing, tragic pandemic, but if Covid-19 does (recur) year after year as we fear, it could be a billion dollar sales business with $2 billion to $3 billion peaks as outbreaks occur."
Also mentioned at the president's press conference were sarilumab, which is a Regeneron (REGN) offering, as well as a drug meant to treat malaria and rheumatoid arthritis that has been around since 1955. Apparently, Hydroxychloroquine has worked well in France treating a very small sample size of patients.
The point is that while a vaccine may be more than a year away, we see the potential of life-saving treatments fro those already sick is much closer. The challenge will be in the mass production and then the breadth of distribution that will likely be necessary. This will be daunting. That said, I think all involved are likely highly motivated.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 229K.
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.
Today's Earnings Highlight (Consensus EPS Expectations)
Before the Open: (TIF) (1.75)