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Good morning Mr. Phelps … When I see the IMF, I still think of the Impossible Mission Force from 1960’s TV. Their IMF team would don disguises and use infiltration tactics to free hostages, recover stolen technologies, or thwart a foreign military coup d’état. Believe it or not, that TV show and the original Star Trek series were produced by Lucille Ball’s company. The more globally recognized IMF (one that the secretary in the TV show would not disavow the existence of if discovered) is the International Monetary Fund. That IMF sees a ‘V recovery’ as nearly impossible – or at least improbable.

In April, the IMF said it expected a global decline of 3% in 2020. They’ve now lowered that forecast to a 4.9% contraction and also reduced growth for 2021 down from 5.8% to 5.4%. They had already expected the largest slump since the Great Depression but reduced expectations anew due to supply shocks that were worse than earlier forecast. Their chief economist Gita Gopinath expects the global 2020 virus loss to reach $12.5 trillion.

The IMF joined Fed Chair Jerome Powell in referencing the unknown challenges that lie ahead. Gopinath said: “A high degree of uncertainty surrounds this forecast with both upside and downside risks. On the upside, better news on vaccines and treatments and further policy support could trigger a faster recovery. On the downside, further waves of infections can reverse increased mobility in spending and rapidly tighten financial conditions, triggering debt distress.”

Though FRB St. Louis President James Bullard said there is tremendous risk and uncertainty as well, he expects a more robust recovery based on “the good response so far.” However, Bullard still worries that something else could happen – leading to depression or another financial crisis. Minneapolis’ Neel Kashkari remains in the Bond Market Review’s camp (or we in his) thinking the real Unemployment Rate is probably nearer to 20%. He also expects a ‘second wave’ of the virus across the U.S. “probably this fall” in his ‘base case scenario’.

Looking Ahead

• Equity cycles show a trend–change low due near July 1st.
• Bond cycles show yields remaining low until a greater trend–change window near July 24th/28th.
• U.S. markets will be closed next Friday, July 3rd, for Saturday’s Independence Day holiday (07/04).

Treasuries, Agencies, and MBS

U.S. Treasury auctions are coming at (or near) record low yields and at ever–increasing (and record) sizes. Though a reckoning will come at some point for the unchecked growing debt, it doesn’t appear at hand. Yields have a low due on June 29th, interim highs near July 8th and July 20th, and a more important window for lows near July 24th/28th. MBS spreads (FNMA 30–year 2.5%) widened by 3 bps last week. In a rather calm week compared to recent activity, yields were .5 bps lower at 2 and 5–years, 1 bps lower at 10–years, and .5 bps higher at 30–years. While somewhat influenced by the new issues from the 2, 5, and 7 –year auctions, that reduced volatility continued into today with yields .5 bps lower at 2–years, .5 bps higher at 5–years, 1 bps lower at 10–years, and 2.5 bps lower at 30–years. The Fed’s balance sheet actually fell for a second straight week (due to a $77.5 billion decline in liquidity swaps). Fed assets fell by $12.388 billion (overall) to $7.082 trillion.

While the government can print all the money it cares to in order to service debt, consumers and companies cannot. Bankruptcy filings for companies just surged the most for any week since May 2009. Data showed that missed or partial housing payments hit 24% in April, 31% in May, and 30% in June. Moreover, mortgage delinquencies rose to a 9–year high of 4.3 million (roughly 8%) following a 723K increase in May. Some of these homeowners might have to sell their properties in an already–challenged existing home market with a sales pace at 10–year lows.

Though the banking system is well capitalized, the Federal Reserve said that big banks would be required to cap dividend payments at current levels and could not buy back shares through (at least) Q3 2020. Fed Vice Chairman for Supervision, Randal Quarles, said they were “taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months.”

Earlier this week, the U.S. Treasury sold a record $46 billion 2–year notes at .193%. Demand was lower to May but good. The buying group that includes foreign central banks accounted for 52.0% of the issue versus 53.1% last month. Wednesday’s record $47 billion in 5–year notes brought a record–low .33% with demand rising versus May. Foreign buying rose from 57.3% last month to 62.3% of the offering. Another record $41 billion in 7–year notes came at a record low .511% today. Demand was good but a little lower than in May. Foreign buying fell back by 1.0% to 62.6%.

6/19/20
Treasury Yield Curve

2-Year: 0.189%

5-Year: 0.327%

10-Year: 0.695%

30-Year: 1.460%

Weekly Yield Change –.005%

–.002%

 –.010%

+.002%
Support 0.193/ 0.203/ 0.213/ 0.223

0.300/ 0.308/ 0.315/ 0.323

0.657/ 0.677/ 0.697/ 0.717

1.400/ 1.430/ 1.460/ 1.490%

Targets

0.154/ 0.144/ 0.134/ 0.124

0.294/ 0.286/ 0.279/ 0.271

0.628/ 0.618/ 0.598/ 0.578

1.372/ 1.342/ 1.312/ 1.282%

Economics

Final Q1 GDP remained at a decline rate of –5.0% and Personal Consumption was unchanged at a 6.80% drop. It’s of course Q2 that remains a large concern with the Atlanta Fed’s GDP–Now forecast dropping from –45.5% last week to –46.6% (annualized). Initial Jobless Claims grew by 1.480 million (above the forecasts for 1.32M) but were 60K lower than the previous week. Though declining for a 12th week, the 14–week total (since the virus–related data began) rose to job losses of 47.24 million. Those won’t necessarily be reflected in other data such as the monthly payroll numbers or the totals for Continuing Claims, which declined from 20.289 million to 19.522M in data that lags a week. While some areas of the economy continue to reopen, others are experiencing second waves of virus concerns and new cases – leading to additional setbacks. The Current Account Balance (net flows to and from other countries) for Q1 2020 was a $104.2 billion deficit, slightly lower to Q4 2019’s $104.3 billion and near a 2–year low.

Bloomberg Consumer Comfort rose for a 5th week, increasing from 40.2 to 41.4. That index had been nearly 26 points higher and at 20–year highs before the pandemic. Kansas City Fed Manufacturing also came back from negatives, rising from –19 to +1. While still a welcome number, Richmond almost got there by increasing from –27 to 0. Most manufacturing numbers went very negative in March and April – with April hopefully marking the worst. After its largest ever drop of 17.89 points in April, the Chicago Fed’s National Activity Index fought back with a reversal to +2.61 in the largest gain going back decades.

The FHFA House Price Index increased by .20% in April. Coming off their largest decline since 2010 with a 17.8% drop, sales of Existing Homes fell another 9.7% to 3.91 million annual units – the slowest pace since 2010. New Home Sales saw a 16.55% bounce to 676,000 annual units, though the increase was partly due to a revision for April data that was 43K lower to 580K. The merchandise trade deficit worsened in May as the Advance Goods Trade Balance shortage widened from $70.9 billion to $74.3 billion. Wholesale Inventories fell 1.20% in May while Retail Inventories were 6.10% lower. Orders for Durable Goods surged 15.80% – the largest increase since July 2014 and well above forecasts for 10.50%. The April decline was revised .40% lower to –18.10%. Ex transportation, orders rose 4.00%. Orders for Capital Goods rose 2.30% versus only 1.00% expected.

Friday is set for Personal Income & Spending, the PCE Deflator, and the University of Michigan sentiment surveys. Monday brings Pending Home Sales for May and Dallas Fed Manufacturing Activity. Tuesday closes out June trading and monthly data with home price indexes from S&P Case Shiller, the MNI Chicago PMI (purchasing report), and the Conference Board’s consumer confidence surveys. Wednesday kicks off July with MBA Mortgage Applications (which fell by 8.70% last week), Construction Spending, ISM Manufacturing, June Vehicle Sales, and the FOMC minutes from their meeting that ended on June 10th. We’ll also get some insight into the June payroll picture (due on Thursday 07/02) from Challenger Job Cuts and ADP Employment Change.

Equities

Stocks followed the cycles by falling into the 22nd and reversing lower after trading up into the 24th. We still expect a lower low near the July 1st trend–change date. An upward trek into a high due near July 14th should be followed by even lower lows into mid to late August. As we said last week: “For the record, we now expect the best buying opportunity to occur near August 17th.”

Last week, the Dow Industrials were 265.92 points or 1.04% higher to 25,871.46. The Dow was .49% lower through today. The S&P gained 1.86% but has lost .45% this week. The Nasdaq gained 3.73% and is .71% higher this week. The Dow Transports lost .05% and are .85% lower this week. Bank stocks rose .81% but are 2.10% lower this week – partially on the Fed statement referenced earlier.

 

Dow:

Nasdaq:

S&P:

Resistance: 25,450/ 25,770/ 26,092/ 26,416

9,906/ 10,007/ 10,107/ 10,208

3,042/ 3,070/ 3,098/ 3,126

Support:

25,060/ 24,817/ 24,503/ 24,191

9,808/ 9,710/ 9,612/ 9,514

3,016/ 2,989/ 2,962/ 2,935


Other Markets

Crude Oil rose 9.62% last week to $39.75/barrel. Crude is 2.59% lower this week. Commodities rose 2.72% but have fallen 1.89% this week. Gold gained .96% and is working on a 3rd advance with a .93% gain this week. The U.S. Dollar rose .28% but is .19% lower this week. The Japanese Yen gained .47% but is .30% lower this week. The Euro dropped by .69% but is .36% higher this week. Corn rose .76% last week but is 4.59% lower this week on good crop reports on produce. Cotton gained 2.87% and is .41% higher this week. 

“You can’t turn back the clock. But you can wind it up again.” Bonnie Prudden

 

Doug Ingram, Financial Economist

 

Additional Information is Available on Request