Fed Fires Huge Bazooka

Just when it seemed like the situation was calming down as the number of new COVID-19 cases in America seems to be peaking and the number of new hospitalizations in NYC is dropping precipitously, the Fed went overboard and announced it would start buying junk bonds. This is somewhat surprising in the sense it has never done that before. On the other hand, it’s common for governments and central bankers to react further even after the worst is over. 

Policymakers want to be sure the situation is better. This is the same logical reasoning that will keep the shutdowns going for a couple of weeks after they need to be in place. NYC probably needs to be closed for about 2 more weeks, but it will be closed for about 4-6 more weeks. We might see it start to reopen in mid-May.

Fed announced the details of its previously announced programs. A surprising aspect of the announcement was that it will expand its corporate lending program to include below investment-grade bonds. It includes junk bond ETFs which is why the HYG high yield corporate bond ETF rose about 6.5% on Thursday. 

This serves a dual purpose as it helps the economy and the energy sector. It has become clear that America wants to protect its oil companies to remain energy independent. Logic is that the price war is trying to eliminate America’s production. These are temporary price declines.

The logic of buying junk bonds is that these are the firms that need help most. Aaa rated bonds never default. It’s better to help the companies that need the money the most. This concept is this doesn’t create a moral hazard because this was an unprecedented economic shutdown. It doesn’t encourage risky behavior in theory. 

The next step would be for the Fed to buy stocks. Everything is on the table as the market deals with this shutdown. If the Fed were to buy stocks, we’d likely see the S&P 500 hit a new record high, gold spike, and the dollar fall. We already saw stocks rise, the dollar fall, gold increase on this junk bond announcement.

Jobless Claims Actually Fall This Week

Jobless claims in last week’s report were revised up from 6.648 million to 6.867 million. Let’s not gloss over how big that revision was. That revision is more than total weekly claims before this disaster. In the week of March 7th, there were only 211,000 initial claims. 

As you can see from the chart below, in the week of April 4th, there were 6.606 million claims which is down from the last report. More claims are a good thing because we know people have lost their jobs. It’s just a matter of getting them the temporary help they need. This report was above estimates by less than previous ones as the consensus was 5 million and the high end of the estimate range was 7.95 million.

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The good news is economists are lowering their expectations to a more beatable level. If that was the peak in initial claims, that confirms the bottom in stocks on March 23rd was real. Keep in mind, since literally everyone won’t be unemployed because of the shutdowns, the level of initial claims is unsustainable. 

New claims are likely from people who were laid off a couple of weeks ago but hadn’t gotten benefits yet. Obviously, there are also some companies that only had enough money to pay their workers for a few weeks. Not many companies can afford to pay their workers for months without having revenues.

Continuing claims report from the week of March 28th showed there were 7.455 million claims. This will be important to watch as the influx of initial claims wanes. This report is obviously a week behind. The peak of continuing claims was actually in the last week of the last recession. The peak was 6.635 million. 

This cycle peak will be much higher. We will be looking for a peak this summer to see when the recession ends. Once the economy reopens, millions of people will get their jobs back.

Crazy Bad Current Conditions

University of Michigan consumer sentiment index cratered in April. The overall index fell from 89.1 to 71 which missed estimates by 4 points. This is the preliminary reading. A final report comes out on April 24th. An 18.1 point decline in the index was the largest monthly drop ever recorded. The 2-month decline was 30 points which is 50% larger than the prior record. 

The current conditions index fell much more than the expectations index which is good news because it means consumers see the light at the end of the tunnel. Current conditions index fell 31.3 points to 72.4 which was by far its biggest decline ever. The prior record was 16.6 in October 2008. That coincides with the chart below which shows real personal consumption expenditures are set to fall 13%.

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Expectations weren’t dire as the expectations index fell 9.7 points which wasn’t the biggest decline ever. The biggest decline was 16.5 points in December 1980. The main question is when the economy restarts. There will likely be a staged opening of the economy starting in mid-May. 

Besides not knowing when the economy will reopen, we don’t know how quickly the recovery will be. The shorter the shutdown, the quicker the recovery.

The good news in this report is the latest data shows the overall sentiment index in the high 60s. In the last report, we saw the latest data showed the overall index would plummet in April. Now it looks like the final April reading won’t be much lower than the preliminary reading. 

Furthermore, it wouldn’t be surprising if the April index is close to the cyclical bottom. We don’t know if it will increase in May, but we do know that when the economy reopens, confidence will come back. This rally in stocks might help confidence.