Monday started the week with a powerful rally following the release of a positive phase 1 vaccine trial. The vaccine, one of hundreds being developed, is expected to go to phase III trials by July. Still there are many hurdles to be crossed to get a safe vaccine in large quantities.
Stocks fell on Tuesday after questions arose about the significance of the positive vaccine trial given the small sample size. Also on Tuesday, Federal Reserve Chairman, Jerome Powell and Treasury Secretary Steven Mnuchin appeared remotely to Congress. While Powell clearly called for more fiscal spending, Mnuchin recommended a take a wait-and-see approach before approving more Federal spending. Powell also said he does not believe the FED’s actions will stoke inflation.
On Wednesday the FED released it’s minutes from the last meeting which highlighted the FED belief that the government must do more to mitigate the economic damage from the virus.
The Committee for a Responsible Federal Budget is projecting that by 2025, Federal debt held by the public (not the FED) will hit 107% of the gross domestic product, exceeding the 106% immediately following World War II. The Federal debt had grown from 35% of GDP in 2007 to 79% of GDP in 2019 before the pandemic.
While the European Central Bank has committed to buying more than a trillion Euros in debt this year, programs for government spending are moving slowly. German and French leaders have proposed a 500BN Euro aid package. However, this will require approval by all 27 EU members and wouldn’t start until next year.
Japan’s government and central bank issued a joint statement on Friday and promised to cooperate further on aggressive measures to support struggling companies and to support the economy.
While many states are moving to partially reopen their economies, it is unknown how quickly the recovery will happen. Automakers have been reopening this week but were plagued by parts shortages, especially imports from Mexico. Health officials will be closely monitoring for significant increases in cases.
Tensions with China weighed on the markets latter in the week. A bill passed in the Senate with unanimous bi-partisan support to delist Chinese companies from U.S. stock exchanges unless they can certify they are not under the control of the Chinese government. Last Friday a bill also passed the Senate with unanimous support to sanction Chinese officials over repression of the Uighur Muslim minority. China announced on Friday it would not be setting a growth target for 2020 due to the virus. China also announced measures to crack down on Hong Kong, as the U.S. considers more sanctions. Still China is promising to meet the Phase I trade deal this year although the likelihood of that the virus impaired global economy seems uncertain.
Stocks still ended the week with gains with the small company stocks having the largest gains.
Treasury yields rose with the 30-year bond ending at 1.374% and the 10-Year note at 0.661%. Crude oil rose to $33.43 and natural gas rose to $1.886 per MMBTUs. The U.S. dollar fell against a basket of currencies and gold prices fell to $1734.70 an ounce.
In economic numbers this week:
- Japan’s gross domestic product fell 3.4% in the second quarter. This follows a 7.3% drop in the fourth quarter putting Japan firmly in recession.
- Japan’s exports fell nearly 22% in the first quarter.
- The National Association of Realtors reported:
- Existing home sales fell 17.8% in April, the biggest drop since July 2010 as stay at home orders prevented the showing of homes.
- The average selling price of a home has risen 7.4% from a year earlier as inventory still remains tight as many homeowners have taken homes off the market.
- The Commerce Department reported a huge slowdown in new construction under the shutdown.
- Housing starts fell a seasonally adjusted 30.2% in April, the largest in records going back to 1959. Single family starts fell 25.4% and multi-family starts fell 40.5%.
- Building permits, an indicator of future housing starts, fell 20.8%, the most since July 2008.
- The Labor Department reported
- 2.4MM workers filed unemployment claims last week. This figures does not include self-employed and gig workers receiving unemployment via the Cares Act.
- Continuing claims, measuring the total number of people that are unemployed, rose from 22.5MM to 25.1MM.
- The EIA weekly oil report is here wpsrsummary. Also, the EIA reported in the past week:
- Field production of crude oil dropped from 11.6MM barrels to 11.5MM barrels per day. The peak production at the end of February was 13.1MM barrels per day.
- Natural gas storage rose by 81BN cubic feet and is above the five year average at this time of year.
- Baker Hughes reported the number of active oil rigs fell 24 to 237 and the number of active natural gas was unchanged at 79.
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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.States Move to Reopen Economies and China Tensions Increase