The new week hasn’t even officially begun yet and we are already expecting a great deal of volatility tomorrow. Stock futures are signaling another day of heavy selling tomorrow while Treasuries are showing sizable gains during overnight trading. A lot can happen between now and tomorrow’s open, but at the moment, it looks to be another extremely active day in the markets. In fact, the entire week is likely to be just as active as the previous few.
Stock futures hit their limit low, which halts trading, just minutes after opening the evening session. This appears to be a result of weekend coronavirus news and the growing number of infections and deaths. From Hollywood to Washington DC to middle America to overseas, the number of cases continue to rise with multiple states now requiring its citizens to stay at home. Without any sign of the pandemic slowing or becoming under control, the markets are fearing the worst in terms of the economic impact on the U.S. and global economies.
Also contributing to tonight’s weakness in stocks and gains in bonds is the failure of Congress to pass a stimulus package this weekend. When an agreement is made, we will likely see stocks move higher as it is expected to include significant help to businesses and corporations, softening the economic blow of the crisis. On the other hand, that same news will probably be taken as a negative by bond traders due to the massive size of the projected plan. Comments from people involved indicate that it will be around $2 trillion. The expected primary source of funding for the plan will be the bond market. That much added supply to the market is expected to outweigh the demand for current securities, likely leading to higher yields in the near future.
With news of a bipartisan agreement possible at any time, be prepared to see bonds move into negative ground once an announcement is made. Traditionally, we could predict an upward move in mortgage rates since they usually track bond yields. Fortunately, there recently has been a disconnect between mortgage bonds that directly dictate rate movement and movement in Treasury securities. That means there is a chance mortgage rates may improve even if Treasuries react negatively to the stimulus package.
We do have quite a few economic releases scheduled for release this week, in addition to a couple of potentially relevant Treasury auctions. However, the markets don’t seem to be too interested in economic data the past several weeks. That mostly is due to the fact the reports being released this month cover February, before the coronavirus took centerstage here in the U.S. Data released next month and in May that covers March and April will be of much more interest to market participants.
The sole exception so far was a spike in weekly unemployment claims last week that did cause a reaction in the markets. New and continuing claims for unemployment benefits are posted Thursday morning each week. Because it is just a weekly snapshot of the employment sector, it used to not draw much attention. That changed last week because it was the first March data that showed a heavy impact from the coronavirus. Look for this Thursday’s update to also be a center of attention for traders. Generally speaking, rising claims is a sign of employment sector weakness that helps boost bond prices and lowers yields (traditionally good for rates).
Scheduled for release this week are New Home Sales Tuesday, Durable Goods Orders Wednesday and the 2nd revision to the 4th Quarter GDP Thursday. Friday has two releases scheduled- Personal Income and Outlays along with the revised University of Michigan Index of Consumer Sentiment for March. The Durable Goods and Personal Income and Outlays reports are the most important releases in that group. However, none of them are considered key pieces of data. The Michigan sentiment index covers March, but it is not a factual release nor a governmental report. Therefore, it doesn’t have the influence that many other reports have. The Treasury auctions are for 5-year Notes Wednesday and 7-year Notes Thursday, both being afternoon events for the bond market.
Overall, there is no way to label a most or least important day of the week. It is safe to assume that the markets will be all over the place yet again. Look for news of an agreement on the stimulus package to cause a positive knee jerk reaction in stocks and a negative impact on bonds. While it very well could be only a temporary influence, it’s the best prediction we can offer at this time.