Markets face more violent swings in the coming week as investors watch out for a rising number of coronavirus cases and new data that could show how the virus is slamming the U.S. economy.
The past week was brutal for stock investors with the Dow Jones Industrial Average posting a 17.3% decline, its worst week since October 2008. But it was the stressed-out credit markets that were at the vortex of pain with a standstill in corporate paper and spreads widening in all areas, from corporates to mortgages.
As economists looked for an even sharper economic downturn from the impact of social distancing, the Federal Reserve in the past week continued to fire away with new programs and liquidity to grease the wheels of nervous markets. By Friday, the dollar stopped its surge, and the Treasury market was a little calmer, with the benchmark 10-year yields sliding under 1% after a wild ride higher earlier in the week.
“The Fed is buying about $70 billion in off-the-run Treasurys today. That brings their total purchases this week to $300 billion,” said Patrick Leary, chief market strategist at Incapital, on Friday. “$160 billion was the highest we saw in any week during the financial crisis.”
Sharp recession
In the week ahead, there is fresh data on manufacturing and the service sector when Markit releases its flash Purchasing Manager Indexes for manufacturing and services on Tuesday.
Consumer sentiment will be important when it is released Friday, but the big tell for the economy will be unemployment claims on Thursday, which are expected to show the impact of massive layoffs at restaurants, stores and other businesses that were forced to close or reduce activity to prevent the spread of the virus.
Claims rose by 33% in the past week to 281,000, an unprecedented jump outside of times of natural disasters like hurricanes. Some strategists say the claims could easily jump to 1 million or more.
“We’re going to start to see the magnitude of the coronavirus impact on the economy. We already started to see some of it in the weekly claims and now we’re going to get a clearer picture,” said Michael Arone, chief investment strategist at State Street Global Advisors. Arone said he’s watching the PMI data. “This data is going to inform us how bad it could get, give us some guidance, some rough rules of the road. Right now, it’s sell first, ask questions later.”
Economists increasingly expect a very sharp but quick recession, starting now. Goldman Sachs economists expect a shocking 24% contraction in second quarter gross domestic product after a 6% decline in the first quarter. The economists expect unemployment to shoot up to 9% from 3.5%, but they see a rebound with growth at 12% in the third quarter.
“I expect that we’ll see abnormal volatility in markets until we begin to see that infection curve flatten, or we see some type of health remedy, vaccine or some solution. I don’t think we’re going to see that in the next few weeks at least,” said Arone. As of Friday, there were about 14,200 cases of the virus in the U.S.
More Fed Artillery
Leary and others believe there is more room for the Fed to expand its arsenal, and that could include corporate debt purchases. Investment grade corporate debt funds and exchange traded funds saw record outflows of nearly $44 billion in the last week, according to Bank of America.
The Fed has already slashed interest rates to zero, added $1 trillion in daily repo operations, and created facilities to help commercial paper, money markets and municipal debt. The dollar has rocketed higher since March 9, and the Fed also expanded swap lines with other central banks, which helped stop the dollar’s run on Friday.
As the world’s reserve currency, companies, investors, banks and other institutions worldwide are looking to raise cash and they want it in dollars, the safest, most liquid currency. That rapid move to cash put a strain on the foreign exchange market, and sent the dollar higher and other currencies sharply lower.
“I think the market is going to be looking for indications that there’s some sort of stabilization, or maybe even a hint of stabilization and that policy makers are taking the right action. I think we’re not yet at that cathartic moment of peak pessimism,” said Ben Randol, foreign exchange strategist at Bank of America. “I’m watching what’s going to happen over the weekend because some pretty big numbers [of new virus cases] could come out, not just in the U.S. but in other countries.”
‘Liquidity infinity’
Strategists say it would not be surprising to see more Fed policy moves next week, and a big fiscal stimulus package is expected to come up in Congress on Monday, to ease the impact of job losses on individuals and help companies weather the downturn.
John Briggs, head of strategy at NatWest Markets, said the bond market responded to the Fed’s actions to make more dollars available, seeming to slow the sale of Treasurys by those parties looking to raise cash. “Things are settling into ranges Friday afternoon, because we can’t take it anymore,” he said.
“The amount of policy thrown at this market was staggering … Liquidity infiinity is what I’m calling it,” he said. “By the weekend, the whole country is literally going to be shut . You have claims at state unemployment offices skyrocketing. What’s the good news over the weekend? That they’re going to pass this bill? That’s already in the price.”