Apr 16, 2020

Axios Markets

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🎙“If I have seen further than others, it is by standing upon the shoulders of giants.” - See who said it and why it matters at the bottom.

1 big thing: Hope vs. reality

Eddie Rodriguez, who works for the city of Hialeah, hands out unemployment applications to people in their vehicles in Hialeah, Florida. Photo: Joe Raedle/Getty Images

After rattling off impressive gains over the past few weeks, the economic reality of the coronavirus outbreak may be starting to set in on the stock market after a spate of economic releases showed the damage the virus has already done.

Driving the news: The S&P 500 fell 2.2% on Wednesday after data showed U.S. retail sales declined by 8.7% in March, more than double the previous record.

  • The headline numbers likely mask even worse details. Wednesday’s report did not include changes in spending on services like hotel stays, airline tickets or movie theaters, and was lifted by a 26% increase in grocery store sales.

The big picture: “With clear signs of panic buying of necessities and the fact that lock downs were introduced only around the middle of the month ... far worse is to come in April and the second quarter more generally,” Michael Pearce, an economist at Capital Economics, tells AP.

Why it matters: Wall Street has been able to shake off most negative economic data as much of the damage was expected. However, the horrific decline in retail sales that followed the largest one-month drop in U.S. consumer sentiment ever recorded shows that the backbone of the economy has been badly hurt.

Between the lines: “Wall Street right now has this big tug-of-war between hope and reality,” Larry Adam, chief investment officer at Raymond James, tells Reuters.

  • “We’re talking about hope we get beyond COVID-19, but in the meantime we get the reality of some of these numbers that highlight some concerns about the consumer.”

Background: The S&P has risen about 26% from its bear market low on March 23, lifted by hopes that U.S. monetary and fiscal stimulus will buoy the economy through the coming recession and on early signs that coronavirus cases were starting to peak in hotspots like New York.

What's next: Economists at Goldman Sachs forecast the economy will shrink by 34% in the second quarter (lower than JPMorgan's 40% expected decline), but also foresee good news on the horizon.

  • "We expect the economy to begin improving in coming months, with the peak virus hit fading thanks to partial relaxation of shutdown orders, adaptation to social distancing, and wider antibody testing to identify those who are now immune."
  • "While longer-lasting economic damage that delays the recovery is possible, so far the news has been mostly reassuring: most layoffs appear to be temporary and there has been no major uptick in bankruptcies at this early stage."
Bonus chart: Where do we go from here?

Data: Department of Labor, UBS, Bank of America, Deutsche Bank; Chart: Danielle Alberti/Axios

Today's initial jobless claims report will no doubt be one for the record books, but the trajectory of filings will provide an important signal about whether the worst has passed or if the bloodletting in labor markets has further to go.

  • Economists at UBS predict filings will fall by nearly 3 million from last week's level, while prognosticators at Deutsche Bank expect an uptick in claims as the backlog in states' data systems is cleared and more Americans were able to file for benefits.
  • Bank of America cut its prediction from 6.5 million to 6 million after the latest Google Trends data showed interest in filing claims waned somewhat.

Where it stands: Around 16.8 million people have filed unemployment claims over the three weeks ending April 4, equaling roughly 11% of the labor force.

2. Catch up quick

The federal government plans to release guidelines for reopening parts of the U.S. economy today. (The Hill)

Business leaders on President Trump's newly formed task force to reopen the economy said the U.S. needs to dramatically increase coronavirus testing. (WSJ)

Globally, more than 2 million people have been diagnosed with COVID-19 and more than 135,000 have died. In the U.S., 30,000 have died so far with 638,000 confirmed cases. (Axios)

3. Americans aren't ready to go back to normal

Data: CivicScience; Chart: Axios Visuals

A majority of people say they would resume at least some level of normal activities if the federal government announced a reopening, a survey from CivicScience provided first to Axios shows.

  • Further, the percentage who say they would restart activities has climbed since last month when 42% of respondents said they would choose to remain in quarantine.

Why it matters: An economic recovery is much more dependent on people's willingness to go out and spend money than it is on whether the government has issued a proclamation.

  • Even if orders are given to reopen businesses across the country, the economy will stay mired in recession if a significant number of Americans are still too scared to leave their homes.

Between the lines: The number of respondents who said they would be willing to resume all normal activities increased from 12% in March to 14% in April, but still represents a small minority of people.

Be smart: "In a recent analysis, a group of researchers including Stanford University professor Nick Bloom, creator of an often-cited uncertainty index, projected gross domestic product by the end of this year would still be down 11% from 2019," Reuters notes.

  • "The analysis began with a litany of questions that boiled down to one: When will it be safe to go outside? Uncertainty around that question may account for as much as half of the lost output, they found."
4. Recession fears and central bank stimulus have helped gold fly
Expand chart
Data: FactSet; Chart: Axios Visuals

Gold prices fell for the first time in five sessions on Wednesday and by the most since March 31, after rising to their highest since late 2012 on Tuesday.

  • A stronger dollar helped clip the value of the precious metal, which has risen by nearly 10% so far this month.

What's happening: In an unusual trend, gold has moved largely in concert with stock prices recently, upending their typically inverse relationship.

What it means: The correlation with equities is largely explained by the actions of central banks, which have unleashed an unprecedented level of monetary policy easing, experts say.

  • The IMF said Tuesday that "central banks have announced plans to expand their provision of liquidity — including through loans and asset purchases — by at least $6 trillion and have indicated a readiness to do more if conditions warrant."

One level deeper: While gold is a safe haven, it is also an alternative to both fiat currency and other assets. Gold pays no interest or dividends, so it is sought by investors when inflation expectations are low.

  • Central bank easing has buried expectations for inflation to rise and also pushed investors out of assets like U.S. Treasury bonds and into risky assets like stocks, pumping up the price.

What to watch: Even at its current value, "gold is a rational trade," Alicia Levine, chief strategist at BNY Mellon Investment Management, tells Axios.

  • "Central banks printing money is part of the reason that gold has and will probably continue to have a bid for a while."
  • "It’s not just an expression of a safe-haven play, it’s also a way of protecting from fiat currency being devalued."
5. PPP loans exhausted in just 2 weeks

It's taken less than two weeks to reach the $349 billion cap for small business loans for the coronavirus stimulus, Axios' Justin Green writes.

Why it matters: This is a sign that more than 1.3 million small businesses (and some larger ones) will eventually get desperately needed cash. It's also a sign that way more might be needed.

  • Paycheck Protection Program loans are forgivable if used for payroll and rent and similar expenses, and they're designed to keep otherwise healthy businesses afloat during this crisis.

What's new: The Small Business Administration reports more than 1.4 million loan approvals totaling more than $305 billion.

  • The $349 billion funding cap is expected to be hit today, multiple media outlets say.

The big picture: In roughly a month, per WSJ, coronavirus lockdowns have...

  • Caused 1 in 10 working-age Americans to file for unemployment.
  • Put historic pressure on businesses not initially affected by the lockdown, with a second wave of layoffs hitting nationwide.

What's next: Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi spoke today about more cash for the program, WSJ notes.

  • Both parties generally agree on $250 billion, but Democrats want extra cash for "hospitals, food assistance and state and local governments," while Republicans want to keep the focus purely on small businesses.

Quote: “If I have seen further than others, it is by standing upon the shoulders of giants.”

Why it matters: Isaac Newton, a mathematician, physicist, astronomer and author who is widely recognized as one of the most influential scientists of all time, was knighted on April 16, 1705.