U.S. and World News
During this Thursday’s stress test of the banking industry, it was discovered that several banks could reach minimum capital requirement levels, prompting the Fed to take action. The Federal Reserve placed new restrictions on the banking industry that requires big banks to cease share repurchases and cap dividends at their current levels for the next quarter. Additionally, banks will need to prove a specified level of net income from the previous four quarters in order to qualify to pay a dividend going forward. Banks are expected to reveal their plans with regards to dividends on Monday, June 29th.- COVID-19 “hotspots” have begun to develop in the United States that include Arizona, Florida, Texas, and California, many of which reporting the largest one-day spike in new cases on record. As a result of the surge in new cases, Houston area hospitals have reached their ICU capacity, leading the state of Texas to roll back their reopening plans and order bars to close immediately. Harris country Texas, the third-largest in the United States by population, just declared a “top level emergency” regarding COVID-19. Shortly after, Florida, which reported a record 8,942 cases yesterday followed suit and ordered all bars to close. Also, the positivity rate in Florida has increased from 4.39% on June 13th to 15.84% this Tuesday, raising questions about the correlation between increased testing and increased cases. The White House coronavirus task force is holding a news briefing regarding the issue today for the first time in nearly two months.
Markets
- Markets are lower after another volatile week. The S&P 500 fell -2.86% and closed at 3,009. The Dow Jones dropped -3.31% and closed at 25,016. Year-to-date, the S&P 500 is down -5.97% and the Dow Jones is down -11.23%.
- Yields also fell lower this week. The 5 year and 10 year U.S. Treasury Notes are yielding 0.30% and 0.64%, respectively.
- The spot price of WTI Crude oil fell this week. Prices fell -4.22% and closed at $38.15 per barrel. Year to date, Oil prices are down -37.52%.
- The spot price of Gold rose 1.53% and closed at $1,770.55 per ounce. Year to date, Gold prices are up 16.69%.
Economic Data
- Initial jobless claims fell by 60,000 to 1.5 million and the four-week moving average of claims fell by 161,000 to 1.6 million. Claims increased by 22,000 in California, 11,000 in Indiana, and by 10,000 in Florida. Claims fell by 36,000 in Oklahoma, 26,000 in Kentucky, and by 11,000 in Massachusetts.
- New orders for durable goods rose by 15.8% versus expectations for an increase of 10.5%
- Durable goods orders ex-transports rose 4.0% versus expectations for an increase of 2.1%
- Core capital goods orders rose 2.3% versus expectations for an increase of 1.0%
- Core capital goods shipments rose by 1.8% versus expectations for a decline of -1.0%
- Personal consumption fell by -6.8%, in-line with expectations
- Personal income fell by -4.2% versus expectations for a decline of -6.0%
- Personal spending rose by 8.2% versus expectations for an increase of 9.3%
- Wholesale inventories fell by -1.2% versus expectations for an increase of 0.4%
- Existing home sales fell -9.7% to a seasonally-adjusted-annualized-rate of 3.91 million units versus expectations for a decline of -5.6%, led by the Northeast (-13.0%)
- Sales of new single-family homes rose by 16.6% to a seasonally-adjusted-annualized-rate of 676k units versus expectations for a reading of 640k units
- The PCE price index rose by 0.1% versus expectations for an unchanged reading and the year-over-year figure rose 0.6% versus expectations for a 0.5% increase
- The core PCE price index rose by 0.1% versus expectations for an unchanged reading and the year-over-year rate rose 1.0% versus expectations for an increase of 0.9%
- The University of Michigan’s index of consumer sentiment fell by 0.8 points to 78.1 versus expectations for a reading of 79.2
Fact of the Week
- At the end of 2019, 61% of the world’s foreign exchange reserves (cash held by central banks around the world) was in US dollars. In total, the world’s central banks held $6.745 Trillion, with the second largest reserve position was the Euro at €2.275 Trillion. (Source: International Monetary Fund)
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For the first time in about 50 years, a border clash between India and China broke out after weeks of rising tensions along the disputed and undefined Line of Actual Control (LAC) that separates China and India in Ladakh and the Tibet region. The high altitude and sub-zero temperatures in the mountainous region led to the death of 20 wounded Indian troops. China has not confirmed the death of any of its troops and has accused the Indian army of provoking and attacking Chinese personnel. Both sides have held talks over the phone, agreeing to cool down tensions, expressing that they do not seek escalation to war. Despite the agreed de-escalation, China and India have sent additional military personnel to the region.
On Thursday, the FOMC announced that it will leave the fed funds target rate range unchanged at 0-0.25%. The Fed expects no change in the rate through 2022. The statement’s characterization of the current economic situation was mostly unchanged from the April FOMC meeting, and continued to acknowledge the “tremendous human and economic hardship” caused by the virus outbreak. The statement once again noted “sharp” declines in economic activity, “a surge” in job losses, and that weaker demand and lower oil prices are “holding down” inflation. The FOMC outlined its economic projections for the next 3 years, expecting GDP growth of -6.5% for 2020, +5% for 2021, and +3.5% for 2022. They also noted that they will increae holdings of UST as well as residental and commercial MBS in order to “sustain smooth market functioning”.
On Memorial Day in Minneapolis, George Floyd, an unarmed black man died while being restrained by a police officer with three officers nearby, all of which have been charged with his death. The tragedy was captured in a cell phone video that went viral and sparked nationwide demonstrations last weekend, some of which escalated to violence and looting. The demonstrations have continued throughout the week and are expected to continue during the weekend resulting in curfews being put in place by major U.S. cities. The National Guard has been called in by nearly half of the country to help police protect communities in the event of violence. A memorial was held yesterday in Minneapolis for George Floyd that was broadcast on networks nationwide.
Today the state of Illinois transitions to Phase 3 of Governor J.B. Pritzker’s reopening plan, while Chicago Mayor Lori Lightfoot has the city of Chicago on hold until June 3rd. Outdoor dining at restaurants and bars, hair salons, and non-essential retail businesses are set to reopen with capacity limitations, social distancing, and enhanced sanitary requirements. In addition to businesses reopening, people may begin gathering in groups of up to 10 people. Illinois is expected to move to Phase 4 of the five-phase plan in late June given all of the requirements are met. In New York, five regions are looking enter Phase 2 of their plan, while New York City is on hold until further notice. All 50 states in America are now at least partially reopened and the COVID-19 test positivity rate continues to decline.
Residents of Midland, Michigan began returning to their homes and assessing the damage from what is being called the “500-year flood” caused by a long period of heavy rain and the failure of two dams protecting the city. Nearly 11,000 people were evacuated from the city as the Tittabawassee River rose to a record 35.05 feet, much higher than the flood stage of 24 feet and left Midland underwater. Concerns over potential spread of toxic contamination arose as floodwaters overtook containment ponds at the nearby Dow chemical plant. Flood warnings remain in effect for the entire area and a forecast exists for more rain next week
The U.S. House of Representatives will vote today on the latest stimulus bill, called the Heroes Act. This round of relief would include another $1,200 stimulus check to all Americans, $200 billion in additional funding for essential workers, and a six-month extension of the enhanced unemployment program. The $3 trillion of additional stimulus would also include funding to state and local governments, among other things. The bill is not expected to pass the Senate however, as it has been met with criticism by Republicans who believe that further stimulus is not necessary at this time. The White House responded to rumors that another stimulus check would be issued to Americans with a statement that said “As President Trump has said, we are going to ensure that we take care of all Americans so that we emerge from this challenge healthy, stronger, and with economic prosperity, which is why the White House is focused on pro-growth, middle class tax and regulatory relief.”
During a press conference, Secretary of State Mike Pompeo stated that he has seen “significant evidence” that COVID-19 originated in a Chinese laboratory and alluded to the possibility of a restructuring, stating “how we restructure … supply chains to prevent something like this from ever happening again”. Another U.S. government official stated that the United States is “turbocharging” the previously put in place initiative to remove global industrial supply chains from China. Some examples of action that could be taken are tax incentives and re-shoring of subsidies for companies doing business in China. The United States is not alone in this initiative as other large trading partners such as India, Japan, and members of the European Union have set aside funds for incentives to companies doing business in China. The United States is also considering creating an “Economic Prosperity Network” (EPN) that would consist of trusted trading partners such as Japan, India, Australia, and others to work toward balancing the economic, political, and security imperatives so that there is less reliance on China for supplies.
As the coronavirus has spread to over 3.2 million people and resulted in over 230,000 deaths, discussions among world leaders regarding the root cause of the virus have begun. While President Trump was talking to reporters Thursday night about the progress of the trade deal he stated that it “becomes secondary to what took place with the virus”, indicating that there could be repercussions for China. The President stated during the press conference that China was spreading misinformation when the virus began to spread and even said that he saw evidence that the virus originated in a Chinese lab. The calls for an investigation from lawmakers across Europe into the root cause of the virus are being supported by Ursula von der Leyen, the head of the European Union’s executive arm. Additionally, she had indicated that she would like to see China work with her organization, and others, during the investigation. In response to widespread criticism over its handling of the virus, Chinese Vice Premier Le Yucheng stated that “China has been open, transparent and responsible in its COVID-19 response.”
Some states are moving forward with reopening business and easing restrictions as they attempt to put the economy back on track. Georgia has allowed barber shops, tattoo parlors, hair salons, massage parlors, and gyms to open cautiously, with requirements such as screening of customers, wearing protective gear, and additional cleaning. Governor Brian Kemp of Georgia has faced criticism for opening business prematurely in a state that has lacked sufficient testing. This morning President Trump signed into law a $484 billion coronavirus relief bill that will primarily provide additional funding to small businesses while also providing funding to hospitals and efforts to increase testing. Some larger public companies have been criticized for taking government aid when unnecessary, while other companies such as Neiman Marcus have announced that they would file for bankruptcy protection. President Trump indicated this week the possibility of social distancing guidelines being extended into early summer and Dr. Anthony Fauci stated that the coronavirus will likely return in the fall. Developing a vaccine remains a critical task for the world and health care giants Johnson & Johnson, Pfizer, and Moderna remain optimistic about their efforts.