Prior week summary
Despite weak domestic economic data, the three major U.S. equity indices moved higher for a second consecutive week as a decline in new hospitalizations in the nation’s hotspots and hope for a swift reopening of the U.S. economy worked to improve investor sentiment. As of Sunday evening, the global infection count sits just above 2.4 million with over 166,000 individuals succumbing to the virus. The U.S. remains the hardest-hit nation, according to official figures reporting approximately 230,000 infections since last Sunday, a 43% increase week over week. New hospitalization figures continued to decline this week in Europe and within the U.S., namely in New York City. The perceived slowing of the spread of the virus has increased calls for an easing of the restrictions that most states have implemented in response to the COVID-19 outbreak. Eager to see a resumption of economic activity, on Thursday the Trump administration released guidelines for “reopening” the economy. The guidelines specify criteria for “passing” each stage in the three-phase approach and leave decisions on how to implement each phase largely up to the governors. Speaking at a news conference announcing the new guidelines, President Trump emphasized the economic damage that the virus has caused saying, “To preserve the health of our citizens we must also preserve the health and functioning of our economy. Over the long haul, you can’t do one without the other,” and argued, “A prolonged lockdown combined with a forced economic depression would inflict an immense and wide-ranging toll on pubic health.”
U.S. economic data for the week largely disappointed as the economic damage caused as a result of the COVID-19 outbreak continued to show up in the data. Retail sales fell 8.7% month over month, over twice as severe as the largest monthly decline during the Great Recession. On the manufacturing front, the dismal data continued. The Empire Manufacturing Index fell to -78.2 in April, by far the lowest level in history and far lower than March’s -21.5 reading. The Philadelphia Fed Manufacturing Index also reported rapidly deteriorating manufacturing conditions, posting a -56.6 reading, well below the -12.7 level seen last month. Additionally, 5.25 million jobless claims were filed last week pushing the total number of filings in the last month over 20 million. Speaking at a virtual gathering of the Economic Club of New York on Thursday, Federal Reserve Bank of New York President John Williams praised the Fed’s response to the virus outbreak but emphasized that there is economic pain ahead saying, “We’re definitely in a severe downturn in economic activity,” and noted, “Even as a pandemic passes through and the economy comes back, I expect demand to be weak and therefore needing strong monetary support, fiscal policy support as well, to get our economy back to full strength over the next couple of years.”
The look forward
In a light week for economic data, market participants will be looking forward to updated figures on existing home sales, new home sales, durable goods orders, and jobless claims, among others.
Market implied policy path (Overnight indexed swap rates)
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal/notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 20-0121