Market Focus: Deflation, Covid-19, and Unemployment Benefits

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Published Date 7/10/2020

The 10 yr this morning at the lows not seen since the beginning of March at 0.57%, stock indexes traded lower before the 9:30 am ET open but opened better. MBS prices at 9:00 am +5 bps. As long as the indexes trade weaker, the rate markets will improve, but we still think there is momentum under any selling in equity markets. A strong correction isn't off the table; there's no other place for investors to go. The stock market continues to be buoyed by just a handful of stocks, mostly techs, and pulling all other stocks up with them.

The banking sector setup for taking some hits; next week begins Q2 earnings season with banks the first to report. Loan loss reserves increasing on the effects of the virus, and slumping consumer spending. Unemployment left many consumers unable to pay back their debts or take on new borrowing, forcing banks to set aside more to cover loans that are not paid on time and crimping their net interest income. Simultaneously, nationwide stay-at-home orders left once-bustling downtowns and retail districts deserted through much of April, May, and June, which probably hurt a cornerstone of banks' growth in recent years: service charges and credit card fees. On the plus side, mortgages are a hot spot for banks. Lenders sell most of the loans they make, and the spread between what they charge borrowers and what they're able to sell the loans for was at its widest in April since 2008.

June PPI data softer than forecasts; PPI -0.2 % on estimates of +0.4%, yr/yr -0.8% compared to forecasts of -0.4%. The core PPI, ex food and energy, -0.3% against estimates of +0.1%; yr/yr core +0.1% lower than +0.4% thought.

New U.S. virus cases topped 60,000 in a day for the first time. Texas, California, and Florida all reported a record number of deaths, while Arizona added 4,057 new cases, the most in six days. Bankruptcies are escalating quickly as the shutdowns continue. Most of the bankruptcies are small and medium-sized businesses, some may come out of bankruptcy proceedings and continue, but many won't be back. Some big companies also hitting the skids, but they weren't in good financial shape before the pandemic; JC Penney, Hertz, and Brooks Bros. the headliners.

At 9:30 am ET, the DJIA opened +24, NASDAQ +4, S&P +3. 10 yr at 9:30 am 0.60% unchanged after trading at 0.57% earlier this morning. FNMA 2.5 30 yr coupon at 9:30 am +6 bps from yesterday's close and +17 bps from 9:30 yesterday.

Recently there has been a move to extend benefits for unemployed workers that are scheduled to end on July 31st. Unemployed were getting an extra $600 a week, in addition to their regular unemployment benefits under the coronavirus bill enacted in March. This encourages compliance with stay-at-home orders, which critics say encouraged the jobless to not look for work. Treasury Secretary Mnuchin said yesterday that the Trump administration wants to cap enhanced unemployment benefits in the next coronavirus package to make sure workers do not get benefits amounting to more than their former wages. The House has passed legislation that would extend the $600 in extra weekly payments until December. Critics say some companies are reporting difficulty in recruitment, despite a national unemployment rate above 11%. Some economists want Congress to pass a relief bill larger than $1.5 trillion with benefits that don't expire until the economy is out of danger. Our question is the obvious, how long would that take, months, years?

Treasuries are at levels testing historic lows.

Source: TBWS

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Wymac Capital, Inc.

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