On t’Mark – Rocks v Bricks, Regression, Conflict, PMIs, Primary on Fire

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On t’Mark – Rocks v Bricks, Regression, Conflict, PMIs, Primary on Fire

Donald Trump largely stuck to his script on Friday when talking about Hong Kong and China, so investors collectively breathed a sigh of relief. As such, risk assets were able to largely squeak a bit higher, although 10yr UST yields dipped 5bp to 0.65%.

This may all change this week, as violent protests in the US continued over the weekend despite many US cities under curfews. It is saddening to see the US regressing back to the 1950s and 1960s racially-divided society.

Trump appears unwilling to even attempt reconciliation. With the US (and global economies) contracting, he needs conflict to have a chance in November’s election. Trump thrives on conflict, and he now has it on at least four fronts – COVID-19 and China, HK and China, Twitter, and now death in custody of black man, George Floyd. As the election date approaches and as he becomes more desperate, there is a chance that he will start hurling more and larger bricks.

This week there is plenty of economic data to digest, with global PMIs offering a quick check on the pulse of individual country’s economies. Domestically, the RBA is up with its cash rate decision on Tuesday and Q120 GDP on Wednesday.

It has been a busy year in the primary market, as companies have been tapping investors for cash at a record pace. According to Bloomberg data, last week saw the US IG market reach US$1trillion of new issuance. To give a sense of how quickly that has been achieved; in 2019 that figure was only reached in November.

Credit investors took comfort from the Fed and other global central banks that have stepped up to support the market. These essentially co-ordinated and scale buying programs have allowed the risk markets to rally. It is likely that we will continue to do so. Fundamentals will eventually take control of the driver’s seat but for now, technical factors are firmly in control of the steering wheel.

One of the key drivers of fundamentals with be the unemployment rate and how quickly everyone can get back to work. At the start of the pandemic, the St Louis Fed roughly estimated that 47million people would lose their jobs, taking unemployment to over 30%. It is worth noting that this was far worse than most other estimates. For example, Morgan Stanley, who was bearish, estimated that unemployment would only hit 13%.

Fast forward a few months, and initial jobless claims have totalled more than 41million. The bad news is that this is likely to under-represent the true picture. As we have stated before, many of the (ineligible) unemployed are still at home and unable to actively search. St Louis Fed president James Bullard pointed out, “If people say that they are not working and also say that they have not searched for a job in the last four weeks or are not available to work, they are categorised as out of the labour force rather than unemployed, and therefore not included in the unemployment rate. One caveat to this longstanding approach is that during a pandemic like COVID-19, people who recently lost their jobs due to state and local requirements to shelter in place or enforce physical distancing may not be looking for work in this environment, which would leave them out of the unemployment calculation.

Bullard continued, “In the US, the participation rate declined by 2.5ppts from March to April, which represented the largest monthly drop for this series on record. At the same time, the number of people counted as out of the labour force but wanting a job (though not seeking a job or not available to work) rose significantly, from about 5.5million in March to 9.9million in April.”

US equities closed mixed, between up 1.3% (Nasdaq) and down 0.1% (Dow). European bourses closed mixed, between up 0.7% (Spain) and down 2.3% (UK).

UST 10yr yields were at 0.65% (-5bp). ACGB 10yr yields closed at 0.87% (unch.). The Aussie dollar was 0.1c higher at USD66.7c.

Credit was mixed: US IG closed at 78 (unch.) and HY was at 541 (-13). In European credit, IG closed at 72 (+2) and XO was at 429 (+14). Aussie iTRAXX was at 101 (+1).

US economic data were soft: PCE– MISS; PCE Core– MISS; Personal Income – HIT; Personal Spending – MISS; Wholesale Inventories – HIT; Trade Balance – MISS; University of Michigan Consumer Confidence – MISS; and Chicago PMI – MISS.

Elsewhere, oil was up 0.1-5.3%. Iron ore was up about 5%.

Tin hats on!

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