Investors have been bracing for the devastating news from the U.S. job market, and last week’s negative report unfortunately will be the first of many to come over the next several months. The unprecedented loss of jobs was brought to light in the weekly Jobless Claims ending March28, which came in at a staggering 6.64 million. This was twice the already unimaginable 3.3 million who filed for benefits the prior week. The non-farm payroll report released on Friday, which showed a loss of 701,000 jobs, understates the actual job decline as the survey’s cutoff date of March 12th was before massive layoffs in the U.S. began. The UE rate jumped from a 50 year low of 3.5% to 4.4%. To fully appreciate the magnitude of the U.S. job losses, since the Department of Labor began reporting jobless claims in 1967, the previous high was 695,000 claims in October 1982. As long as the U.S. remains in lock-down due to COVID-19, Street economists are predicting the UE rate will climb from 8.2% in April and peak at 12.7% in June. The hope is the U.S. fiscal stimulus programs will help to mitigate some of the job loss, and the “furloughed” employees will be able to return to work once the U.S. virus containment polices are lifted.
As we enter next week’s trading sessions, the market price action from last week showed investor anxiety may be abating. Despite the unparalleled increase in U.S. jobless claims, the VIX actually dropped last week notwithstanding the price decline in the S&P 500. The VIX fell from 67.38 to 46.80 (25.98%) during the week, which is a far cry from its all-time peak of 82.69 seen on March 16th. After the extraordinary and rapid implementation of monetary and fiscal stimulus by the G20 governments and central banks, the primary driver for asset prices and market volatility remains COVID-19. Investors are looking for a peak and eventual decline in new cases and deaths. The unfortunate toll of Covid-19 as of Saturday afternoon on the world’s population is 1.14 million cases and 60,887 deaths according to the Johns Hopkin Coronavirus data center. A peak and ebbing of COVID-19 cases could provide global economists and strategists a basis from which to predict a potential bottom of the global recession. This is important as history has shown that financial markets tend to turn positive one month before the nadir of a recession. We can only hope this potential turnaround is not too far off.
In turning to next week’s economic calendar, in a light week for data we will again key on Thursday’s U.S. jobless claims and an update on the University of Michigan’s Consumer Confidence survey. We begin Thursday morning with the Producer Price Index (PPI) report for March which is expected to be unchanged, with expected declines in energy and food prices of 1.2% and 0.3% respectively. The core PPI Index is estimated to have risen by 0.1%.
The Weekly Jobless claims for the week ending April 4 is expected to rise to 7 million after the 6.64 million seen last week. This would be the third consecutive week of new all-time highs. We finish Thursday with the University of Michigan consumer sentiment index, which is projected to decline six points to 83.0. Consumers are adjusting to the COVID-19 containment policy and corresponding layoffs.
On Friday we finish up the week with March’s report for the Consumer Price index (CPI), which is estimated to decline by 0.3% to a 1.6% annual rate. The decline is driven by the 6.3% drop in energy prices and the COVID-19 induced decline in lodging prices.
The Week In Review
U.S. Equities
U.S. equity markets declined last week as several corporations continue to furlough workers, sending the U.S. weekly jobless claims to a record 6.64 million.
- Dow Jones -2.65%, MTD -3.89%, YTD -25.74 B. S&P 500 -2.02%, MTD -3.68%, YTD -22.56%
- Russell 2000 -6.99%, MTD -8.75%, YTD -36.69%
Drives: I) The rate of auto sales plunged from 17.0 million units in February to 11.4 million in March. The dramatic decline in auto sales will surely add to the negative economic data that will cause a sharp decline in Q1 GDP growth. Even though COVID-19 had major impact on auto sales for the latter portion of March, Q1 auto sales are down at a 35.1% annual rate, a pace that will negatively impact Q1 GDP by an approximately 1.0%.
II) Pending Homes Sales in February increased by 2.4% on a m/m basis and was up 9.4% compared to February 2019. The residential real estate market in the U.S. was on firm ground as historically low mortgage rates drove up sales as affordability improved, and the demand outstripped supply. The COVID-19 pandemic will slow the real estate market, but the past has shown the sector had rebounded well in areas that were hard hit.
III) The Conference Board’s Consumer Confidence Index in March dropped to 120 from the 132.6 level seen in February. The U.S. economy which was solid just a few months ago, has now entered a recession which is expected to last through the second quarter. A recovery in consumer confidence will depend on how long the COVID-19 lock-down continues and when consumers can return to work and a semblance of a normal life.
IV) March’s ISM Manufacturing Index declined from 50.1 in February to 49.1. The better than expected decline was helped by a sharp increase in supplier delivery times. In a normal period, a lengthening of delivery periods would signal strong demand, but the current delays were due to a COVID-19 induced shutdown across the supply chain. The ISM new orders fell to 42.2 from February’s 49.8, employment dropped from 46.9 to 43.8.
V) Equities Month to Date are down with Large-Cap, Growth, Energy and Consumer Staples leading equity price performance. The laggards for the period are Small-Cap, Value, Utilities and Financials
Capitalization: Large Caps -4.03% (YTD -23.44%), Mid-Caps -6.00%(YTD -31.45%) and Small Caps -8.75% (YTD -36.69). Style: Value –8.36% (YTD -41.15%) and Growth -7.38% (YTD -31.20%). Industry Groups: Consumer Staples +1.50% (YTD -11.64%), Healthcare -2.09% (YTD -14.46), Technology -4.12% (YTD -15.53%), Information Technology -4.26% (YTD -16.45%), Utilities -6.65% (YTD -19.13%), Communication Services -5.12% (YTD -22.81%), REITs -5.54%(YTD -23.66%), Consumer Discretionary -5.75% (YTD -25.95%), Materials -5.41%(YTD -30.16%), Industrials -4.68% (YTD -30.39%), Financials -5.66% (YTD -35.68%) and Energy -+2.49% (YTD -49.23%).
European Equities
The MSCI Europe Index was lower last week by -2.75% driven by the sharpest decline in the Eurozone Composite purchasing managers index in history, as COVID-19’s continues to negatively impact global economic activity.
Drivers: I) The Euro-zone’s March Composite PMI dropped by 21.9 points from February to 29.7. This is the largest decline on record, and the PMI Composite now stands at its lowest historical level. The sharp decline in PMI has economist projecting Q2 GDP in Europe could fall by as much a 15.0% on an annual basis. Economists are also forecasting economic activity could reach bottom in late April to Mid-May, declining 20.0% below typically normal levels.
II) Eurostat reported Euro-zone headline inflation fell by 0.5% to a 0.7% year over year rate in March. This decline has been a COIVD-19 driven drop in oil prices, as energy price inflation fell by 5.0% to a -4.3% annual rate. Core prices were lower by 0.1% month over month, prompted by a drop-in services price inflation to 1.3% YOY. Food prices increased by 0.3% m/m and at a 2.4% annual increase due to temporary shortages at stores.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was lower by -2.75% for the week (MTD -4.84%, YTD -27.99%).
Asian Equities
Asian equity markets declined as uncertainty remained as to how long the pullback in global economic growth will continue due to COVID-19. The Dow Jones Asia Index dropped by -4.22% for the week, (MTD -3.08%, YTD -23.80%).
Drivers: I) Japan’s industrial production rose by 0.4 m/m in February, after a solid jump of 1.0% in January. This was the third consecutive monthly increased after the sharp decline in October and November due to the consumption tax hike and supply chain disruptions caused by typhoons. The production of semiconductors and semi-conductor producing equipment jumped by a solid 14.5% and 5.1% respectively, in February.
II) China’s NBS manufacturing PMI in March surged by 16.3 points to 52, well above the Street consensus estimate of 44.8. This followed the sharp drop in February of 14.3 points to 35.7. March result was the highest since October 2017, highlighting the rebound from the historic low reading in February when COVID-19 caused widespread closures of factories and an unprecedented disruption of economic activity. The rebound was widespread including output (up 26.2 points to 54.1) and new orders (up 22.7 point to 52.0).
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -7.24% (MTD -5.80%, YTD -23.91%), the Hang Seng Index fell by -1.08 (MTD -1.55%, YTD -17.21%) and the Shanghai Composite declined by -0.30% (MTD +0.50%, YTD -9.38%).
Fixed Income
Treasury yields declined last week, after the release of data for U.S. weekly jobless claims and non-farm payroll offered a glimpse of the negative jobs numbers to come.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.596% down from 0.683%. The 30-year yield declined last week finishing at 1.215% down from 1.268%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index ros +0.73% last week, MTD +0.26% and YTD +3.42%. The Bloomberg Barclays US MBS TR was higher by +0.10% last week, MTD +0.10% and YTD +2.92%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.50% for the week, MTD -2.05% and YTD -14.48%.
Commodities
The DJ Commodity Index was higher last week by +0.95% and is up month to date +2.61% (YTD -25.80%). The commodity index rose last week as oil surged based on hope OPEC and Russia will come to a truce in their production dispute.
Performance: I) The price of oil was rose last week by +32.78% to close at $29.00 and is higher month to date by +41.60 (YTD -52.50%). Oil posted a strong gain as President Trump proposed oil producers OPEC, Russia and possibly the U.S. could coordinate a production cut due to the demand drop caused by COVID-19.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +2.41 ending at 99.05 for the week (MTD +1.64%, YTD +4.45%). The USD saw a sharp rise as investors sought out dollar assets as global economic data continues to worsen.
III) Gold rallied last week as investors continue to seek a safe haven in gold and cash, as economies around the global remain shut down due to COVID-19. Gold was higher by +1.74% last week, rising to $1648.8 (MTD +3.27%, YTD +8.25%).
Hedge Funds
Hedge fund returns in April are lower with the core strategies, Equity Hedge, Event Driven, Relative Value and Multi-Strategy are in negative territory, while Macro/CTA is higher on the month.
Performance:
- The HFRX Global Hedge Fund Index is lower at -0.34% MTD and down -7.17% YTD.
- Equity Hedge has declined by -0.86% MTD and lower by -14.07% YTD.
- Event Driven is lower MTD -0.33% and is down YTD -5.82%.
- Macro/CTA has risen by +0.43% MTD and is down -0.75% YTD.
- Relative Value Arbitrage has dropped by -0.41% and is lower -5.82% YTD.
- Multi-Strategy is lower MTD at -0.34% and has dropped by -5.74% YTD
Data Source: Haver Economics
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