Oil Price Collapse Sets Risk-Off Tone

Apr 20, 2020
Oil Field in Cushing, Oklahoma

Oil Prices Collapse to 1998 Lows

Oil prices collapsed over the weekend from $18.27 a barrel to $12.07, the largest percentage slide ever, and the lowest price since 1998. The catalyst is continued slack demand and full storage facilities. Literally, there’s no place to put it. That has markets in a risk-off tone as the week begins. The market’s reaction  to the pandemic has shifted from case counts and death totals to assessing the Trump administration’s plan for gradually reopening the economy. While the plan does not have a defined timetable,  it throws most responsibility to the states and revolves around adequate testing to quickly identify and isolate outbreaks that will inevitably occur. The problem is most states have been begging for help in getting adequate testing supplies for weeks now. We believe that will remain a sticking point that limits the degree to which governors will be able to reopen parts of their economies in the coming month or two. Meanwhile, the Congressional tug-of-war between the House and Senate will continue this week. Senate Republicans want to approve a standalone $250 billion bill to replenish the SBA PPP loan program, but Congressional Democrats want to add $100 billion for hospitals, and $150 billion for  states to the aforementioned SBA bill. The early word this week is that such a plan is very close. We shall see.


Treasuries
Treasury Curve Today Week Change
3 Month 0.10% -0.20%
6 Month 0.13% -0.08%
1 Year 0.15% -0.03%
2 Year 0.20% -0.02%
3 Year 0.25% -0.05%
5 Year 0.35% -0.06%
10 Year 0.63% -0.09%
30 Year 1.25% -0.09%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 1.11%
6 Mo LIBOR 1.10%
12 Mo LIBOR 0.98%
Swap Rates
3 Year 0.408%
5 Year 0.475%
10 Year 0.705%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Apr 20 Chicago Fed National Activity Index Mar -1.81% -3.00% 0.16
Apr 21 Existing Home Sales Mar 5.38m 5.25m 5.77m
Apr 21 Existing Home Sales MoM Mar -6.8% -9.0% 6.5%
Apr 22 FHFA House Price Index MoM Feb 0.4% 0.3% 0.3%
Apr 23 Initial Jobless Claims Apr 18 4.500m 4.500m 5.245m
Apr 23 Bloomberg Consumer Comfort Apr 19 NA NA 44.5
Apr 23 Markit US Services PMI Apr P 30.0 30.0 39.8
Apr 23 New Home Sales MoM Mar -15.0% -16.3% -4.4%
Apr 24 Durable Goods Orders Mar -12.0% -12.0% 1.2%

calendar icon Top 5 Events for the Week

April 20 — 24, 2020

1. Coronavirus Developments — All Week
2. Congressional/Fed Actions — All Week    
3. Weekly Jobless Claims — Thursday
4. March Durable Goods Orders — Friday
5. March Housing Sales — Tuesday/Thursday

 

1.  COVID-19 Developments – All Week

The market’s reaction  to the pandemic has shifted from case counts and death totals to assessing the Trump administration’s plan for gradually reopening the economy. While the plan does not have a defined timetable,  it throws most responsibility to the states and revolves around adequate testing to quickly identify and isolate outbreaks that will inevitably occur. The problem is most states have been begging for help in getting adequate testing supplies for weeks now. We believe that will remain a sticking point that limits the degree to which governors will be able to reopen parts of their economies. While the stock market reacted favorably to the initial report, the bond market likes to nestle in the more troublesome details so that’s probably why fixed income prices rose Friday, in spite of the risk-on equity rally. This week will be one of getting a better handle on just how likely we are to see the necessary protocols stood up that will allow even the most tentative of reopenings.

 

2.  Fed and Congressional Actions – All Week

The Fed’s is taking the usual heat for it’s expanded tool box that it unveiled over a week ago, but just like in the Great Recession it’s the one government agency that has risen to the occasion and tried to stem the damage as much as is possible in its remit.  Meanwhile, the Congressional tug-of-war between the House and Senate will continue this week. Senate Republicans want to send a standalone $250 billion bill to replenish the SBA PPP loan program, but Congressional Democrats want to add $100 billion for hospitals, and $150 billion for  states to the aforementioned SBA replenishment bill. The early word from the weekend that such a deal is very close. Let’s hope those rumors are correct.

 

3.  Weekly Jobless Claims — Thursday

Weekly jobless claims continue to provide the market with the most immediate read on the impact of the economic shutdown. Four weeks ago claims rose to 3.3 million after years of being under 300 thousand and most recently in the low 200 thousand range. The 3.3 million bounce for the week ending March 20 was followed by a 6.6 million spike on March 27 and 6.9 million on April 4. Last week the number settled a bit at  5.245 million. Still all the numbers are the largest ever recorded for this series dating back to its mid-60’s beginnings.  The expectation this week is for claims to settle again to around 4.5 million. That would put claims over 26 million for the last five weeks. With 150 million people in the labor force, the exploding claims numbers buttress forecasts of unemployment approaching 20%.

 

4.  March Durable Goods Orders – Friday

More March data here to show us the scope and degree of damage as the economic shutdown became a reality. For the month, overall orders are expected to decrease –12.0% versus a modest  1.2% increase in February. Orders ex the volatile transportation sector are expected to be a little better but still negative at —5.0% versus -0.6% the prior month. Shipments of nondefense ex-aircraft (a proxy for business investment) are also expected to be down  –4.8% versus –0.8% in February.

 

Monthly Change in Durable Goods Orders

 

5.  March Housing Sales — Tuesday/Thursday

The March Existing Homes Sales (Tuesday) and New Home Sales (Thursday) will give us another picture of a once percolating segment of the economy that has been brought to its knees by the economic deep freeze. Existing home sales constitute nearly 90% of the market so it gives us the broadest view of what is happening in residential real estate and for the month sales are expected to decrease 9.2% (5.24mm annualized) versus increasing 6.5% in February (5.77mm annualized). Meanwhile, new home sales are expecting an even deeper slide with sales expected to decrease 16.3% to 640k annualized versus 765k annualized in February.

 

 


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Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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