Market Watching Reopening News & Looming State Budget Cuts

May 11, 2020
Restaurant with a few people

Reopening Developments and Looming State Budget Cuts

 Trading this week will once again focus on any news regarding partial economic reopenings in various states and localities. Last week, equity markets resumed their optimistic run while Treasuries assumed their more circumspect role after a mid-week softening following larger-than-expected funding plans by the Treasury. The April jobs report was every bit as bad as feared but  equities continued to look past the wreckage of April and May, latching onto any positive news that businesses and other parts of the economy are slowly reopening. Meanwhile, expectations for a nearly trillion dollar stimulus bill to aid states and cities were dashed last Friday when the White House said no further stimulus measures would be forthcoming this month while they await the economic impact from said reopenings. That news came just after an April employment report found 981,000 jobs lost in state and local governments. That is larger than any single-month decline for the entire economy in the Great Recession. Expect more political wrangling on this issue as state budget cuts start to be formulated and enacted.  Finally, April Retail Sales (Friday) and CPI (Tuesday) headline the next round of horrible economic numbers, along with the May read on consumer sentiment on Friday (spoiler alert: not good).


Treasuries
Treasury Curve Today Week Change
3 Month 0.10% UNCH
6 Month 0.13% +0.02%
1 Year 0.13% -0.02%
2 Year 0.15% -0.03%
3 Year 0.21% -0.02%
5 Year 0.33% -0.01%
10 Year 0.69% +0.08%
30 Year 1.41% +0.17%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.43%
6 Mo LIBOR 0.69%
12 Mo LIBOR 0.78%
Swap Rates
3 Year 0.259%
5 Year 0.351%
10 Year 0.648%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
May 12 NFIB Small Business Optimism Apr 86.5 85.0 96.4
May 12 CPI MoM Apr -0.7% -0.8% -0.4%
May 12 CPI Ex-Food & Energy MoM Apr -0.2% -0.2% -0.1%
May 12 CPI Ex-Food & Energy YoY Apr 1.7% 1.7% 2.1%
May 15 Advance Retail Sales MoM Apr -11.0% -11.7% -8.4%
May 15 Retail Sales Ex Auto and Gas MoM Apr -5.5% -6.0% -2.8%
May 15 Retail Sales Control Group Apr -4.2% -4.2% 2.0%
May 15 Industrial Production MoM Apr -11.4% -12.0% -5.4%
May 15 U. of Mich Consumer Sentiment May P 67.5 68.0 71.8

calendar icon Top 5 Events for the Week

May 11 — 15, 2020

1.  Coronavirus/Reopening Developments — All Week    
2.  Congressional Actions — All Week
3.  April Retail Sales — Friday
4.  April CPI — Tuesday
5.  May U. of Michigan Sentiment — Friday

 

1.  Coronavirus/Reopening Developments — All Week

This week the focus on trading will once again revolve around assessing the status of the partial economic reopenings in various states and localities. Last week, equity markets resumed their optimistic run —even with the historically bad April employment numbers— while Treasuries assumed their more circumspect role after a mid-week softening following larger-than-expected funding plans by the Treasury. The April jobs report was every bit as bad as expected, but equities continued to look past the wreckage, grabbing onto any positive news that businesses and other parts of the economy are opening once again. There remains, however, a growing divergence between stocks that are just 20% off all-time highs and the economic damage on display in the latest jobs report and which is likely to be repeated in May. Equities are pricing for a serious V-shaped bounce that may prove hard to come by given the extent of job losses across all sectors of the economy. Some consolidation of the April and early May equity gains could provide the catalyst for Treasuries to break through range resistance that has held since mid-March.

 

2.  Congressional Actions – All Week

Expectations for a nearly trillion dollar stimulus bill to aid states and cities were dashed last Friday when the White House said no further stimulus measures would be forthcoming this month while they await the economic impact from reopening state and local economies. That news came just after an April Jobs Report found 981,000 jobs lost in sate and local governments. That is larger than any single-month decline for the entire economy in the Great Recession. Revenues are down anywhere from 12% in North Carolina to 36% in Georgia to more than 50% in Massachusetts, Kansas, Missouri, Pennsylvania and Montana. In Georgia, the legislature is asking all agencies to cut 14% from the 2021/2022 budgets with inevitable cuts to education, public safety and health care looming. Expect, similar moves to be made in other states. While partial reopenings will provide some relief, it will pale in comparison to the hole that’s already been dug.  This space will  be the next political football in this crisis.

 

3.  April Retail Sales — Friday

The April Retail Sales Report will deliver some numbers, much like the jobs report,  that we’ve never experienced in a lifetime, but with some partial reopenings of businesses in May perhaps the April report will be the worst of it in regards to retail sales. Overall sales are expected to be down -11.7% versus –8.4% in March. Sales ex-auto and gas are expected down -6.0% versus -2.8% in March. The retail sales Control Group—a direct feed into GDP—is expected to be off –4.2% versus a  surprising gain of 2.0% in March. Sobering numbers to be sure as the consumer clearly hunkered down in April even more so than he/she did in March.

 

4.  April CPI — Tuesday

With policy rates at or near zero and $4 trillion in fiscal stimulus heading to the economy, one could be concerned about incipient inflation but that’s not today’s story, nor concern. Given the global collapse in demand, the more immediate concern is with deflation. April CPI is expected to be down –0.8% versus down -0.4% in March when the first extent of the shutdowns started being felt.  The core rate (ex-food and energy) is expected to decrease 0.2% versus -0.1% the prior month. On a year-over-year basis, CPI is expected to fall from 1.5% to 0.4% while core CPI YoY is expected to dip to 1.7% from 2.1% the prior month.   A 1.7% core YoY reading would be the lowest since 2017. While the stimulus and low policy rates might contribute to inflation eventually, the more immediate concern is that the drop in commodity prices and other goods and services doesn’t spiral into a deflationary impulse.

 

Core and Overall CPI

 

5.  May University of Michigan Sentiment — Friday

The May University of Michigan Consumer Sentiment will reflect the ugliness of the April Jobs Report as the full economic brunt of the shutdowns manifests in plunging confidence. While the April reading plunged from 89.1 to 71.8, the May report is expected to see a slowing in the decline but a decline in sentiment nonetheless. The May read is expected to print 68.0. If that comes to pass it will be the lowest reading since December 2011. The low for the Great Recession was 55.3 set in November 2008. Thus, while sentiment is plunging it doesn’t appear that it will eclipse the depths of the Great Recession, but then again, it’s still early in the crisis.

 

 


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Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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