05/15/2020
Stocks mounted a charge toward their relief rally high of 2939 on Monday, only to fall just short, closing at 2930. Sentiment, however, then took a turn for the worse, falling 3.8 percent over the subsequent two days. The VIX index of implied volatility had closed below 30 last Friday for the first time since late-February. But after edging fractionally lower on Monday, it has climbed higher this week to a level of 37 on Thursday, reflecting the return of risk-off sentiment. 

Sobering reminders from the healthcare community over the lingering dangers associated with the coronavirus in testimony before a Senate committee set the more negative tone on Tuesday. That was followed on Wednesday by remarks from Fed Chairman Powell regarding the economic challenge that lies ahead, given the risk that the initial liquidity concerns evolve into solvency concerns as the recovery unfolds slowly. He indicated that more fiscal and monetary help is needed to ensure that doesn’t happen. The Democratic-led House unveiled its plan for a new $3 trillion round of stimulus, in an opening salvo in the negotiation with the Senate that will follow. For its part, the Senate has pushed back, insisting on more time to understand the impact of the stimulus that has already been provided. But it does seem likely that another round of stimulus is likely, of undetermined size and timing.

Bond Yields Decline; Consumer Prices Fall 

Bond yields have declined modestly so far this week. In early Thursday trading the ten-year Treasury is yielding 0.61 percent, down from its Friday close of 0.68 percent. The two-year note is currently yielding 0.16, up fractionally from 0.15 percent on Friday. High yield spreads had narrowed slightly over the course of Monday and Tuesday this week but widened on Wednesday despite the high yield index being virtually unchanged, as treasury yields fell.

The effects of the economic slowdown were evidenced in the April report on consumer prices. The headline report fell 0.8 percent, the most since December 2008. That brought the trailing twelve-month rate to 0.3 percent, the lowest since 2015. The category of food consumed at home rose by the most in almost 50 years, while gasoline prices plunged by 21 percent. The core rate fell 0.4 percent, the most in over 60 years, bringing the trailing twelve-month core rate to just 1.4 percent, the lowest since 2011. Producer prices for April were also weaker than expected. Falling prices only complicate the Fed’s challenge of pushing inflation to a sustainable 2.0 percent pace. Despite that challenge, Chairman Powell has dismissed the possibility of official rates turning negative, at least for the time being. 

Jobless Claims Reach 36 Million; Investors Watch for Moderately Positive Data out of China 

New claims for jobless benefits rose once again as expected this week. The nearly 3 million new claims represented a very modest deceleration from the previous week, but the total of the past eight weeks now exceeds a staggering 36 million. Aside from the jobless claims, Friday’s economic reports may be the most eagerly awaited of the week, and all are expected to be exceptionally soft. Retail sales, industrial production, and preliminary May consumer sentiment are scheduled and will provide a telling, full-month look at the impact of the virus mitigation efforts. 

China is also scheduled on Friday to report its latest round of economic data for April, including retail sales, industrial production, and fixed investment. All are expected to show modest improvement from March as the economy slowly reopens but remains weak overall. Earlier this week the Eurozone reported a 11.3 percent drop in industrial production in March. In contrast, the weakest monthly reading during the financial crisis was -4.1 in January 2009. 

Important Disclosures:
Sources: Factset, Bloomberg, Economic News Release, U.S. Bureau of Labor Statistics, May 12, 2020.

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An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.

A 2-year Treasury note is a debt obligation issued by the United States government that matures in 2 years.

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The Consumer Price Index (CPI) is an inflation indicator that measures the change in the total cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly by the Commerce Department and is also commonly referred to as the cost-of-living index. Unless otherwise noted, CPI data in this report is one month trailing.

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