While the equity market has been looking ahead, and the hopes of better times, we did get April Personal Income and Spending figures and they offered an upside surprise, but some bad as well. Personal income for the month surprisingly rose by 10.5%, the most in the history of the series, and that’s versus –2.2% in March and –5.9% expected. The income increase, however, has more to do with enhanced unemployment insurance benefits (that sunset July 31), one-time stimulus checks, and unemployed boomers applying for social security benefits. Meanwhile, personal spending fell –13.6% in April versus –6.9% in March and –12.8% expected. The percentage drop in spending was easily the steepest in the series’ history. The previous record prior to the last two months was a –2.1% dip in January 1987. The Fed’s favorite inflation indicator, core PCE, fell from 1.7% to 1.0%, the lowest since a 1.0% print in January 2011. As we mentioned, the equity markets are largely ignoring the horrible run of April reports but the Treasury and other fixed income markets are tuned in and are not quite as optimistic about a quick V-shaped rebound as equity traders are. When there is a split between markets we tend to come down on the side of the much larger fixed income market. While they may be a glass half-empty bunch sometimes the glass is half-empty.
Above, we went on about the dichotomy between equities and bonds in viewing the rebound from the depths of the recession, which looks to have put in a bottom in April. Equities have cast aside most concerns about possible lingering economic damage from COVID-19, and have retraced all but the final 14% of the 37% drop that occurred in February and March. Treasuries meanwhile, have spent the last two months range-bound with very little variation between highs and lows in yields. While equity traders may have convinced themselves that we’re in store for a V-shaped recovery, fixed income traders are much less convinced. The graph below traces the 10-year Treasury yield since the beginning of the year.
The 10-year Treasury yield has risen 5bps during May and is still well within the 0.54% to 0.78% range that has held over the last two months as shown in the graph. Treasury investors, despite a deluge of supply in the last several weeks, seem less convinced the economy will rebound in short order like equity investors, and we tend to side with fixed income traders in this outlook.
1st Quarter GDP Revised Lower - Sets Stage for Record Low 2nd Quarter
The second look at first quarter GDP was released yesterday and was revised lower from –4.8% to –5.0% as drop in gross private investment from –5.6% to –10.5% override a slight upward revision to personal consumption (-6.8% vs. –7.6%). While the decline in first quarter GDP is notable it won’t hold a candle to the expected plunge in second quarter GDP which is forecast to fall –34.2% annualized. If that expected plunge is realized it will be a new record quarterly fall, eclipsing the -10.0% drop in the first quarter of 1958. Looking further afield, forecasts for third quarter GDP are currently around 15.0% as the expected rebound commences.
Continuing Claims Fall Implying 17% Unemployment Rate
The jobless rolls in the US shrank for the first time during the coronavirus pandemic in a sign people are starting to return to work, even as millions more Americans filed for unemployment benefits. Continuing claims, which tally Americans’ ongoing benefit claims in state programs, fell to 21.1 million for the week ended May 16. That suggests the job market is starting to rebound as businesses reopen. Analysts had expected an increase in continuing claims from 24.912 million prior to 25.68 million forecast. This is the first decline since the pandemic started and by far the largest decline in history. The unemployment rate fell to 14.5%, a sharp drop of 2.6% from the prior week. That level implies about a 17% BLS unemployment rate from its current 14.7%.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.14%||+0.03%||1 Mo LIBOR||0.17%||UNCH||FF Target Rate||0.00%-0.25%||3 Year||0.270%|
|6 Month||0.16%||+0.02%||2 Mo LIBOR||0.36%||UNCH||Prime Rate||3.25%||5 Year||0.367%|
|2 Year||0.16%||UNCH||6 Mo LIBOR||0.55%||-0.04%||IOER||0.10%||10 Year||0.660%|
|10 Year||0.66%||+0.01%||12 Mo LIBOR||0.68%||-0.03%||SOFR||0.06%|