Not that the market is focused much on the current slate of economic results, we did get first quarter GDP this morning giving us a look at the beginnings of the economic calamity as the pandemic started to be felt in March. Recall that January and February economic results were generally positive, if not looking more robust than the fourth quarter. The collapse in March colored the entire quarter which contracted –4.8% annualized, a bit worse than the -4.0% expectation and off from the 2.1% gain in the halcyon days of the prior quarter. Personal consumption declined a staggering –7.6%, well beyond the –3.6% expectation, and light years from the 1.8% fourth quarter gain. It’s the steepest drop in 40 years. Meanwhile, expectations for the second quarter are for the full extent of the economic shutdowns to be felt with a –26.0% annualized contraction expected which would be the largest quarterly decline dating back to 1947. With two-thirds of the economy consumption-based, consumer confidence is key to forecasting future growth and in that regard we have a brand new read on confidence and expectations which we cover in more detail below.
As mentioned above, with two-thirds of the economy tied to consumer spending, gauging the depth of the expected drop in confidence is important ,but also assessing consumer expectations will begin to inform us as to when growth may return to the economy. In that regard, yesterday we received April’s read on consumer confidence and it plummeted, pretty much as expected, to 86.9 from 118.8 in March (white line). That’s the largest monthly drop since December 1973, the second largest ever and the lowest outright level since June 2014. Expectations, on the other hand, rose from 86.8 to 93.8 (blue line). The expectations reading was at 108.1 in February, prior to the coronavirus gripping the nation. There may be some “it can’t get any worse” in the expectations bounce, but the fact it is still well below February levels signals some lingering apprehension on the part of consumers.
The Present Situation reading fell to 76.4 vs. 166.7 March (red line). The 90-point plunge was more than twice any prior month drop. For those looking for glimmers of hope, we ran the series back to the prior recession, and as shown, today’s numbers across all three measures are still well above the bottoms reached in that recession, especially the expectations reading. That can mean one of two things: (1) despite the economic shutdown consumers are beginning to look past today’s situation and better days ahead, or (2) the suddenness of the shutdowns and shift in economic fortunes still hasn’t been fully processed by consumers. We’d like to think it’s the former situation and not the latter.
Fed Begins Tweaking New Programs with Muni Lending Expansion
Today’s FOMC meeting won’t involve any major change in monetary policy, what with rates already at 0%-0.25% and unlimited QE, but it may involve some formalizing tweaks to some of the programs stood up over the past couple weeks. One of those tweaks has already taken place with the Fed announcing Monday that the Municipal Lending Facility (MLF) will be expanded. The facility, as revised, will purchase up to $500 billion of short-term notes issued by states, counties with a population of at least 500,000 (previously 2mm), and U.S. cities with a population of at least 250,000 (previously 1mm). The new population thresholds allow substantially more entities to borrow directly from the MLF than the initial plan announced on April 9.
To be eligible for the facility, notes must mature no later than 36 months from the date of issuance—an increase from the previously announced 24-month maximum term. In addition, among other rating requirements, eligible issuers must have had an investment grade rating as of April 8, 2020, from at least two major nationally recognized statistical rating organizations. The termination date for the facility has been extended to December 31, 2020 in order to provide eligible issuers more time and flexibility.
With Senate Majority Leader Mitch McConnell commenting that states should be allowed to file bankruptcy rather than expect the federal government to bail out underfunded pension plans, the fate of the next stimulus bill, focused on state and municipalities, was put into some question. While it’s still expected a bill will be forthcoming, the comment has put a little anxiety in muni prices. We think, however, that between the Fed-provided funding and an eventual bill from Congress, investors may want to consider highly-rated municipal securities as the uncertainties have pushed yields higher. While off the highs of late March, as the graph below shows, yields are 40-60bps above levels from early March, prior to the coronavirus-induced mayhem.
Agency Indications — FNMA / FHLMC Callable Rates
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