Prior week summary
The major U.S. equity indices moved lower on the week as weakening domestic economic data and rising geopolitical tensions soured investor sentiment and jeopardized hopes for a V-shaped economic recovery. The economic picture continued to darken this week as the latest economic data releases highlighted the severe impact the COVID-19 outbreak has had on economic activity. The latest release of the Consumer Price Index (CPI) saw prices drop 0.8% over the month, the largest decrease since 2008. The core measure of CPI, which excludes the volatile food and energy components, dropped 0.4% in April, the largest recorded decrease, and the first time that the reading has posted back-to-back drops. The Producer Price Index saw an even larger drop as prices fell 1.3% in April, far more than March’s reading. The effects of country-wide lockdowns were on full display in the April retail sales figure, as retail sales fell 16.4% over the month with every category except for online shopping posting declines. Jobless claims continued to mount with another 2.98 million Americans filing for unemployment in the last week, bringing the eight-week running total to over 35 million individuals. Federal Reserve Chairman Jerome Powell held speaking engagements this week and warned that, “The path ahead is both highly uncertain and subject to significant downside risks,” and that, “The passage of time can turn liquidity problems into solvency problems.” When asked about the possibility of negative interest rates this week, Powell downplayed the idea saying, “I continue to think, and my colleagues on the Federal Open Market Committee continue to think, that negative interest rates is probably not an appropriate or useful policy for us here in the United States…There’s no clear finding that it actually does support economic activity on net. And it introduces distortions into the financial system, which I think offset that.”
As of Sunday evening, the global infection count stands just below five million confirmed infections with nearly 320,000 people succumbing to the virus. Russia’s outbreak has continued to worsen with the country now accounting for over 290,000 infections, the second highest in the world. In the U.S., the outbreak has shown signs of slowing as the number of new daily cases have slowed country-wide on average and the number of recoveries and hospital releases has continued to increase. The perceived slowing in the severity of the outbreak has continued to persuade states across the country to begin the process of reopening their economies with only Connecticut and Massachusetts opting to leave all restrictions in place. Nonetheless, the U.S. recorded over 160,000 new cases since last Sunday, an 11.8% increase week over week. The COVID-19 outbreak has also worked to strain relations between the U.S. and China. During an interview last week, President Trump expressed his displeasure with China’s handling of the virus outbreak and suggested that cutting ties with China, the world’s second-largest economy, was an option on the table. Treasury Secretary Steven Mnuchin emphasized that all options are being considered saying, “The President is concerned. He’s reviewing all his options. Obviously, we’re very concerned about the impact of this virus on the economy, on American jobs, the health of the American public and the President is going to do everything to protect the economy and protect American workers.” In a statement released after President Trump’s comments, Zhao Lijian, Deputy Director of the Chinese Ministry of Foreign Affairs Information Department, expressed a desire for cooperation between the two sides saying, “Both China and the U.S. should now be cooperating more on fighting the virus together, to cure patients and resume economic production, but this requires the U.S. to want to work with us on this.”
The look forward
In a light week for economic data, market participants will be looking forward to the release of updated figures on housing starts, building permits, existing home sales, and jobless claims, among others.
Market implied policy path (Overnight indexed swap rates)
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