Which Way Is Up?

Which way is up?  Stocks sold off late in the session, giving up early gains after the President hinted at potential sanctions against Beijing.  Another 2.1 million Americans filed first time unemployment claims last week and the US economy shrank by -5% last quarter, and yes, there may be some good news hidden in those numbers.

N O T E W O R T H Y

Just below the surface. Yesterday, the Department of Labor announced that 2.1 million first time claims for unemployment benefits occurred last week.  That number brings the total number of job losses in the past 10 weeks to 40 million - that is around 1 in 4 working Americans, in case you were wondering.  Wow… that IS bad! But wait, as usual, the headline number doesn’t tell the full story. Also included in the weekly employment report is a statistic called Continuing Jobless Claims. As the name implies, it represents the number of Americans who remain unemployed and continue to file claims.  In contrast the headline Initial Jobless Claims covers workers who have been recently unemployed and filed for the first time.  While the Initial Claims number gives us a very timely pulse of the wave of job losses, the Continuing Claims number gives us a better view of a recovery.  If Continuing Claims decrease, we know that either folks have stopped filing (unlikely) or that they have been rehired and are no longer eligible for benefits.  Yesterday’s Continuing Jobless Claims came in at 21.052 million, which was lower than economists were predicting and lower than last week’s claims of 24.912 million.  Americans appear to be getting back to work... slowly.  A week from today we will get the monthly employment situation which is expected to show the Unemployment Rate reaching 19.5% this month.

Multitasking executive.  After days of saber rattling between the US and China, the President put a fine point on his intentions yesterday, and the market didn’t like it.  The Administration has been bristling over Intellectual Property rights and the treatment of minority Muslims in China for some time.  Congress has enacted a bill prompting the President to sanction China over human rights abuses against Uyghur Muslims.  The bill, which is now on the President’s desk gives him the ability to apply sanctions as he sees fit.  The Administration has been critical of China’s handling of the Coronavirus outbreak and threatening sanctions on that front as well.  Markets have largely been ignoring the flair up in tensions, focusing instead on the reopening of the country. Beginning last week, Administration officials began to ramp up rhetoric on Beijing’s treatment of Hong Kong and earlier this week, China enacted new rules on how it plans to govern the island.  The new rules appear to violate the “one country, two systems” principal in which Hong Kong is responsible for its own governance.  In response to the new rules the President could sanction China, taking away Hong Kong’s independent status which affords it many trade benefits. Yesterday, stocks were poised to log a fourth positive session with the Dow Jones up by over +200 points by 2:00 PM when the President announced that he will be holding a press conference related to China today.  The announcement prompted a swift selloff into the close with the Dow ending the session -147 points in the red.  Oh, did I mention that the President signed an executive order aimed at removing legal protection of social media platforms?  Yes, the same ones that helped him attain the White House and continue to solidify his position with his base… also the same ones which helped propel the stock markets to new highs leading up to the current crisis.

Hide and seek.  The economy shrunk by -5% last quarter according to the Bureau of Economic Analysis, the largest drop since the last recession.  And yet… the stock market is rallying?? It makes us all wonder, who is pushing this market up in the midst of all of these calamitous numbers.  Bespoke Investments released a report which shows that money is flowing out of equity mutual funds into fixed income, but someone is obviously still buying stocks.  In case you haven’t noticed, $1 trillion worth of investment grade bonds have been issued year to date, which is a lot in a short amount of time compared to historical standards. Wanna guess who is buying those bonds?  Flow data suggests that institutional money is flowing out of equities and into bonds and money markets… following the Fed.  Data recently released from retail oriented brokerage firms show a massive increase in speculative buying from smaller retail investors.  Are these retail investors right?  Let’s hope so.

THE MARKETS

Stocks gave up early gains after the President announced a news conference (to be held today) regarding China sanctions.  The announcement was enough to spook traders causing the rally to fade into negative territory for the close.  The S&P500 fell by -0.21%, the Dow Jones Industrial Average sold off by - 0.58%, the Russell 2000 dropped by -2.48%, and the Nasdaq Composite Index slipped by -0.46%.  Bonds pulled back and 10-year treasury yields climbed by +1 basis point to 0.69%.

NXT UP

- Personal Income (April) is expected to have dropped by -6.0% compared to the prior month’s -2.0% drop.

- Personal Spending (April) is expected to have fallen by -12.8% compared to a -7.5% pullback last month.

- PCE Core Deflator (April) may show year over year inflation 1.1%, down from last month’s read of 1.7%.

- University of Michigan Sentiment (May) is expected to come in at 74.0, slightly better than the prior release of 73.7.

- Fed Chairman Jerome Powell will speak today.

- A time has not yet been released for the China press conference which is expected to happen today.  This could be a market mover.

- Next week we will get manufacturing/services PMI’s, Factory Orders, Durable Goods Orders, and the monthly employment situation numbers. Check back on Monday for calendars and details.

daily chartbook 2020-05-29