June 17, 2020 - Market Update

This morning the MBA mortgage applications index rose 8.0% in the week ending June 12^th after rising 9.3% in the prior week. Purchases were up 3.5% after rising 5.3% in prior week, and refis increased 10.3% after rising 11.4% in prior week.

Today, the NY Fed will conduct two Fed trade purchase operations totaling up to $4.721B starting with up to $1.744B GNII 2.5% and 3% at a 10:20am ET followed by up to $2.977B UMBS30 2% through 3% at 11:50am ET.

Yesterday markets felt like a slug fest. By the end of the day, the S&P 500 was up +1.90% marking the third straight move upwards, with every sector trading higher. Also, the Dow Jones (+2.04%) and the NASDAQ (+1.75%) saw strong performances. Meanwhile, US treasuries sold off (+3.1bps) as investors moved out of safe havens with yields settled at 0.754%.

There was an array of headlines to go through yesterday, let’s begin with positive ones. In the data front, a strong US retail sales report for May rekindled hope to investors that the economy might be able to bounce back quicker than expected. The headline figure saw an increase of +17.7%, more than double the +8.4% expected, while the previous month’s decline was revised to show a smaller -14.7% contraction. The industrial production numbers weren’t quite as positive as the retail sales figures, though they did show a +1.4% rebound in May (vs. +3.0% expected). Capacity utilization remains well below the worst levels of 2008/09. That said, the NAHB’s housing market index rose to 58 (vs. 45 expected), so all eyes will be on today’s housing starts and building permits data to see if that rebound in housing is evident in other releases.

Fed Chair Powell appeared before the Senate Banking Committee yesterday, as part of the semi-annual monetary policy report to the Congress. In his prepared remarks, Powell said that “the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.” Also, Fed Vice Chair Clarida weighed in on the inflation debate citing the pandemic as a deflationary shock to the economy. He indicated that the Fed is placing a high priority on keeping inflation expectation anchored, amidst risks of long-term inflation expectations falling due to the economic fallout.

The good news yesterday was that an Oxford University trial reported that the steroid dexamethasone was found to reduce coronavirus deaths by a third in patients who required ventilation. Less positive developments elsewhere, Beijing announcing that schools would be shut and online classes resuming, following new COVID-19 cases in the city. Over in the US, the news wasn’t exactly positive either as the case numbers in certain states continued to move in the wrong direction. In Florida they reported a +3.6% rise in cases yesterday, above the 7-day average of +2.5%. In Texas, the number of virus hospitalizations rose by +8.3%, the most in nearly 2 weeks. California new cases rose by +2.3%, above the weekly average of 2.1% while confirmed hospitalizations rose by 7.5%.

During 4/20, US personal income rose 10.5%, its biggest jump ever. The rise was entirely due to the $1,200/$500 personal stimulus checks and the $600/week increase in unemployment insurance payments. Despite that, consumer spending still shrank by a record 13.6% in April due to fear and lockdowns. Thus, savings jumped to 33%, quadruple or quintuple its normal rate. This money will help households pay their bills, at least temporarily.