Retail sales collapsed 16.4% in April, the largest single-month decline on record.
The only bright spots were online retailers and food and beverage stores, but food and beverage stores merely stole share from restaurants and bars.
Industrial production plunged as well, off 11.2% — its largest monthly drop. And, manufacturing output dropped 13.7%, also its largest decline ever. 
Capacity utilization fell to 64.9% – well below its 80% average rate.
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It’s surreal, watching our “leaders” debate how many deaths are acceptable and whether workers and children should be sent back into harm’s way. Only a few weeks ago, we all agreed upon the need to flatten the pandemic’s curve so we could prevent a surge from overwhelming our medical system. Now, the debate is about flattening the soaring jobless claims and preventing the country from falling into a depression.
I wish I knew the answer. I don’t. But, I’m fairly certain that if we emphasize the economy to the exclusion of medical issues, it would all be for nought – especially for the dead. As the country reopens and COVID-19 cases and deaths resume their rise, we’re all canaries in the coal mine.
Futures are off sharply this morning and appear likely to reach our next downside target either today or tomorrow.
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April PPI joined CPI in reflecting the severe economic pressures building in the US, dropping 1.2% YoY. Even stripping out food, energy and trade, producer prices fell 0.9% MoM and 0.3% YoY. The cost of goods fell 3.3% MoM, the biggest decrease since 2009.
Powell’s comments at the Peterson Institute will get underway shortly. A preview of his prepared statement suggests his mood will be somber and his optimism tempered by the realities of the pandemic.
Algos are anxious to hear whether he can promise anything more impactful than “whatever it takes.” The overnight bounce has probably run out of steam.
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Headline CPI fell 0.8% MoM – the biggest drop since 2008…
…thanks primarily to plunging energy prices.
Core CPI fell 0.4% MoM, the biggest drop since it began being tracked in 1961.
The details show strong upticks in food and medical care but weakness almost everywhere else.
Like almost all economic data lately, the algos have chosen to ignore inflation, as VIX dropped another 7.7% from its overnight highs. For the moment, nothing else seems to matter much.
VIX has fallen from 47.77 to 26.37, a 45% decline, since ES backtested its 2.24 Fib extension on April 21. SPX has climbed a total of 8% during that time – with the great majority of its gains on overnight ramp jobs driven by plunges in VIX.
Today, the algos are also watching the bond market quite closely, as the Fed is slated to dip its toe into corporate bonds – including junk bonds – for the first time.
What could go wrong?
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Futures are off sharply, eyeing a bevy of gaps and Fib levels left in the wake of last week’s nonsensical algo-driven ramp.
Our yield curve models swung bearish last week, as did a number of other sentiment-based indicators. Perhaps the most compelling is the 2Y, which plunged below critical support at 17 bps, testing 10 bps before bouncing.
The 2s10s is currently confirming, though CL and USDJPY are swinging into action in an effort to stave off a significant downturn. Under ordinary circumstances, a breakout in USDJPY would prop up stocks. But, current circumstances are anything but ordinary.
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Unemployment reaches 14.7%. It’s a sobering headline, but it could be worse. As the BLS explains…
Due to the impact of the COVID-19 pandemic, the relationship between the two was no longer stable in April. Therefore, the establishment survey made modifications to the birth-death model.
If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis).
In other words, actual unemployment (U-6) is nearly as high as the 24.9% registered during the Great Depression.
Since the futures have already ramped 30 points (50 points from overnight lows) higher…
…on the usual nightly collapse in VIX…
…we’ll have to wait until the cash market opens to see whether or not carbon-based investors agree that 85-year highs in unemployment are insignificant.
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Yes, we’re getting yet another ramp job in front of the latest dismal economic news.
Like all the others, this one was driven by another sharp drop in VIX, which finally managed to tag our 100-DMA target (but, only because the 100-DMA has been steadily rising.)
It was also driven by a pop in oil prices, driven by Aramco’s announcement that it was raising the official selling price of Arab light crude offered to Asian customers by $1.40/barrel, to US customers by $1.50/barrel, and to Northwest European customers by $6.55/barrel.
The announcement did manage to push prices slightly above the Feb 2016 26.05 lows. But raising prices in a buyers’ market is obviously an exercise in futility. Its value is primarily in signaling algos that better times lie ahead — at least for a few hours so that any damage wrought by the unemployment data starts from a higher bar.
Speaking of unemployment, initial claims totaled 3.17 million, slightly above the 3 million consensus, and points to a total of 33.5 million for the past seven weeks for an unemployment rate of 16%. From Bloomberg:
It remains to be seen whether reopening some states will make a material difference.
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In a bit of a delayed reaction to Treasury’s announcement of its $3 trillion borrowing needs in Q2, the 2s10s has pushed above the white TL connecting all-time lows – a clear warning, should it last, for equities.
Meanwhile, CL backtested its Feb 2016 lows and USDJPY broke down at about the same time that ADP announced another 20 million job losses (roughly in line with Friday’s NFP.) All of this came on the back of dismal earnings from market darling Disney.
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SPX and ES tagged our downside targets yesterday and proceeded to close at overhead resistance. Of course, that was before the overnight ramp got started. Now, with oil and gas breaking out in response to much of the country re-opening and VIX taking a larger than usual pre-market dive…
…ES is up 37 points and seemingly in the clear.
Is it time to jump on board stocks again?
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When Warren Buffett – normally one of the market’s biggest cheerleaders – says he can’t find any compelling buys, traders take notice.
“We have not done anything because we don’t see anything that attractive to do,
They might also be wondering just how ugly March Durable Goods (due at 10AM) will be and what to make of escalating tensions between the US and China.
S&P futures tagged our next downside target overnight and are struggling to retake the 20-DMA.
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