Prior week summary
The major U.S. equity indices moved lower on the week as fears of a resurgence of COVID-19 in the U.S. dominated headlines and soured investor sentiment. As of Sunday evening, the global infection count sits just under 10.3 million cases with the U.S. and Brazil accounting for nearly 40% of the global tally. Head of the WHO Health Emergencies Programme Dr. Mike Ryan offered a grim outlook for the Americas at a press conference last week saying, “I would characterize the situation in the Americas in general as still evolving, not having reached its peak yet, and likely to result in sustained numbers of cases and continued deaths.” Some states in the U.S., particularly those in the South and California, have seen significant rises in infection rates over the last two weeks. While testing capacity has increased rapidly across the country over the last month, the rise in infections outpaces the rise in testing capacity alone and has sparked fears of a “second wave” of COVID-19 that could shatter hopes for a robust economic recovery in the second half of this year. After Texas saw significant increases in both infections and hospitalizations in the last week, Texas Governor Greg Abbot ordered a halt to the phased reopening of the state and has ordered the closure of bars. Some corporations, including Apple, have also closed stores in the nation’s current hot spots heightening fears of a return to the draconian lockdown measures seen in March and April. The Trump administration has continued to express an optimistic view of the data downplaying the risk of a resurgence in COVID-19 and highlighting the recent pickup in economic activity as states across the country begin to gradually reopen their economies. White House Economic Advisor Larry Kudlow suggested that a robust recovery will come in the second half of this year but also warned of a modest resurgence in the COVID-19 outbreak saying, “There will be some shutdowns individually…in individual places and certain stores. We are keeping a very close eye on this,” and noting, “We’re going to have hot spots. No question. We just have to live with that.”
The economic data releases for the week painted a mixed picture of the economic recovery. Existing home sales dropped in May to 3.91 million, down from April but above analyst expectations, while new home sales in May beat both expectations and April figures. The IHS Markit flash readings for June indicated a significant recovery in both the services and manufacturing sectors of the U.S. economy as both sectors reaped the benefits of an ease in lockdown restrictions in the U.S. The third estimate of first-quarter GDP indicated that the U.S. economy shrank at a 5% annualized pace, in line with consensus estimates. Many analysts warn that second-quarter GDP will fare much worse with a double-digit decline in GDP likely. The oft-watched Atlanta Federal Reserve’s GDPNow forecasting tool currently forecasts a 39.5% decline in U.S. GDP for the second quarter. The IMF slashed its global economic forecast this week as the global economy continues to experience a pronounced slowdown in economic activity as a result of the COVID-19 outbreak. The IMF now sees the global economy shrinking 4.9% in 2020.
The look forward
Market participants are gearing up for a busy week of economic data releases with updated figures on ISM Manufacturing Index, construction spending, ADP employment report, jobless claims, factory orders, and the June non-farm payroll report dotting the economic calendar. The minutes from the FOMC’s policy meeting earlier this month will be released on Wednesday.
Market implied policy path (Overnight indexed swap rates)
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