Trade War 2.0?

Trade war 2.0?  Stocks could not hold onto gains yesterday, selling off late in the session as traders could not ignore grim employment numbers.  The war of words between the US and China are heating up again, and now it’s going beyond its handling of the Coronavirus outbreak.

N O T E W O R T H Y

The butcher’s bill.  Yesterday’s news stream included an expected, but quite ugly, reminder of the dour employment situation in the US.  Yesterday, ADP reported its monthly National Private Sector Employment number which showed that 20.236 million Americans lost their jobs in the month of April alone.  It was the largest recorded drop in the series’ history which dates back to 2002.  Breaking down the number, we note that Goods-Producing accounted for roughly 21% of the losses while Service-Providing made up the remaining 79%.  Further analysis shows that the biggest losses came from Leisure / Hospitality (-8.61 million jobs) and Trade / Transportation / Utilities (-3.44 million jobs).  The sheer number of losses within the month is staggering considering that it is nearly double the total amount of total job losses during the Great Recession.  That said, none of us should be surprised at the overwhelming figure.  Economists were expecting the survey to come in right around that level and non-economists need only look out their windows to see the devastation caused by all of the mandated business closures.

The Government has been hard at work since the onset of the pandemic.  Congress has enacted laws providing record-size stimulus packages while the Federal Reserve continues to aggressively support all corners of the credit market through lending and asset purchases. Those efforts have played a big role in keeping the situation from getting much worse and will be the driving force behind getting the economy back on its feet. Though it may be early on to be asking the question, you might be at least wondering “who is paying for all of this?”  Well, under normal circumstances the simple answer would be: we, as tax payers are footing the bill.  Of course, these are not “normal circumstances”. With so many Americans out of work, recently lowered corporate tax rates, and lower taxable revenues due to virus-related sales declines, the Government is taking in far less tax revenue than in the past.  The CARES Act itself had a total cost of $2.2 trillion followed by another $480 billion to replenish small business funding and to provide more aid to hospitals.  Not taking into account the Government's other ongoing financial responsibilities, this is going to be a rather costly year.

When governments spend more than they take in, they run an account deficit and that deficit is financed through the issuance of debt.  Fortunately, the US has fairly solid credit and is able to issue vast amounts of debt in the form of treasury bills, notes, and bonds.  The cycle, to be clear, is fairly normal and is practiced by all governments around the globe. As we all know, these times are not normal, and they call for extraordinary measures.  To fund the rapidly swelling national account deficit the US Treasury is issuing a record amount of bonds. Yesterday, the Treasury announced that it will need to raise a record $4.5 trillion in this current fiscal year (ending in Sept) alone.  Its plans include an increase in the use of longer maturity 10-year notes and 30-year bonds.  Further, the Treasury announced that it will be selling 20-year notes for the first time since the 1980’s.  No ordinary times, indeed.  The announcement caused selling in longer maturities in anticipation of the increased supply.  The end-result, of course will be a record-sized deficit and national debt. Going back to the question of who is paying for all of this.  Our kids and our grandkids.

THE MARKETS

Stocks could hardly maintain gains through yesterday’s session and selling intensified into the close as investors digested earnings and a weak employment figure. The S&P500 fell by -0.70%, the Dow Jones Industrial Average gave up -0.91%, the Russell 2000 traded off by -0.82%, and the Nasdaq Composite index advanced by +0.51% led by technology shares. Bonds sold off and 10-year treasury yields went up by +4 basis points to 0.70% while 30-year treasury yields climbed by +6 basis points to yield 1.39%.

NXT UP

- Weekly Initial Jobless Claims (May 2) are expected to show that 3 million Americans filed first-time claims for unemployment benefits.  The number is down from last week’s 3.839 million claims.

- Atlanta Fed President Raphael Bostic, Minneapolis Fed President Neel Kashkari, and Philadelphia Fed President Patrick Harker will all speak today.

- This morning Becton Dickinson, Ball Corp, YETI Holdings, Hilton Worldwide, Virtu Financial, AmerisourceBergen, Raytheon Technologies, Bristol-Myers Squibb, ViacomCBS, and Reynolds beat earnings estimates while DISH Network and JetBlue Airways missed.  After the bell we will hear from Cloudflare, Glu Mobile, Roku, iHeart Media, Zillow Group, Uber Technologies, Dropbox Inc, Live Nation Entertainment, Monster Beverage, and TripAdivsor Inc.

daily chartbook 2020-05-07