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Daily Commentary

Commentary prepared by Alloya Investment Services, a division of the wholly owned CUSO of Alloya Corporate Federal Credit Union. Alloya Investment Services is a leading broker/dealer consultant to credit unions.

Wednesday, April 8, 2020 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Alloya Investment Services

Market Indications

Historic Treasury Curves

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.20+0.01
2s/10s Tsy Spread0.47+0.02
2s/30s Tsy Spread 1.06+0.03
DJIA-30 22,653.86-26.13
NASDAQ 7,887.26-25.98
S&P-500 2,659.41-4.27
Dollar Idx 100.09+0.18
CRB Idx 127.95-0.10

Daily Commentary

Recap – S&P 500 gave up a 3.5% gain at its best levels of the day (to end in the red). This was the biggest surrendered gain in the S&P 500 since October 17, 2008. The Dow saw an epic 963-point plunge, or down 4.1%. For the day, all of the major equity indices ended lower. All of a sudden, all the calls of there being a new “bull market” ended with a thud. And in case you thought oil was supporting things – as the Organization of the Petroleum Exporting Countries (OPEC) was about to agree to some magical thinking deal – think again. West Texas Intermediate (WTI) was clubbed after a strong open. Treasury yields were higher (two-year +2bps; 10-year +6bps) for the second day. The 10-year Treasury benchmark ended at 0.71%.

Graph from Bloomberg titled 10Y Treasury

On the COVID-19 front, the human cost continues to increase with confirmed cases in excess of 1.4 million – particularly in the U.S. and Europe. The U.K. yesterday reported its highest number of deaths yet as Prime Minister Boris Johnson remains in intensive care where his condition is described as “stable.” The U.K. is reporting a chronic shortage of ventilators. In the U.S., confirmed cases reached 400,000. New York State’s Governor has allowed businesses the right not to serve any customer not wearing a mask. Good grief — in a span of six weeks, we have seen the President go from calling this a “hoax” to the New York Governor enforcing masks on top of an aggressive lockdown. It is okay — just blame the WHO.

A survey conducted by the Peter G Peterson Foundation found that 73% of Americans have already seen the outbreak depress their incomes; 24% stated “very significantly.” In terms of spending behavior, 48% said they cancelled all travel plans and 35% have postponed (or cancelled outright) a big-ticket consumer durable good. In total, 71% reported a dampening in total personal or business activities (survey taken from March 24-29). You do not see numbers like this in a plain-vanilla recession, I assure you. In fact, when this was beginning to look like “just” a recession in February, 13% of the respondents said they were starting to adjust their spending plans accordingly.

And if you want a gauge of the enormity of the shock on a global basis, 1.25 billion people work in sectors directly affected by the crisis (retail, manufacturing, accommodation, food services, travel). For the year as a whole, we are looking at 25 million job losses. It will take years to absorb this loss unless you think a V-shaped recovery will take hold in the third quarter and be sustained, which I would peg as a 1-in-100 probability of occurring.

Nobody wanted to hear what former Fed Chair Ben Bernanke had to say yesterday at the Brookings Institute regarding a V-shaped recovery: “We’ll probably have to restart activity fairly gradually and there may be subsequent periods of slower activity again.” So as pundits try and sell you on the V-shaped recovery, ask them how they are handicapping the Bernanke notion of a future relapse in growth (like we had in 2002 when, to the surprise of many at the time, a bear market rally very quickly morphed into a 30% plunge to the fundamental lows).

On the docket today, investors will be watching today’s U.S. crude oil inventories number at 10:30 am with interest after the Energy Information Administration (EIA) cut the country’s output forecast for 2020 by 1.2 million barrels per day. The minutes of the most recent Federal Reserve meeting will be published at 2:00 pm.

Overnight, Asian markets were mostly lower. However, Japan’s Nikkei closed in the green (+2.13%). In Europe, the Stoxx 600 Index was down 1 % as data pointed to a grim outlook for some of the region’s biggest economies. S&P 500 futures were broadly unchanged, the 10-year Treasury yield was at 0.72%.

 

Economic Calendar

April 6 - 10, 2020: The Week Ahead

Economic Calendar

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations

Expected Fed Funds Path

Select Probabilities based on the Futures 
Probability of Fed Funds rate HIKE on April 29, 202012%
Probability of Fed Funds rate CUT on June 10, 20201%

**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.

The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Alloya Investment Services to discuss your specific situation and objectives.