- Coronavirus Infections Jump by More Than a Million in Less Than Two Weeks Globally there are more than 5.1 million recorded cases of the coronavirus, up from 3.85 million two weeks ago and more than 333,000 deaths.
- Coronavirus not under control in US, warn Imperial scientists About half of all states still have reproduction rates above one, report shows
- On Wednesday, Montgomery, Ala., Mayor Steven Reed announced his city was facing a crisis: the hospitals were out of ICU beds. “Right now, if you’re from Montgomery, and you need an ICU bed, you’re in trouble … our health-care system has been maxed out.” Reed said. The news came as a research team warned that a second wave of coronavirus infections was likely in the South — Dallas, Houston, southeast Florida, the entire state of Alabama — where reopening has happened rapidly, and other counties with cases on the rise.
- India reports record jump in cases as lockdown eases. India relaxed some of its travel restrictions on Friday to permit members of the Indian diaspora to reenter the country.
- Russia, Brazil drive largest daily jump in new cases
- President Trump said that he wouldn’t be closing down the country again if a “second wave” of the virus does hit.
- On the positive side, this chart shows a decrease in COVID-19 infection rates after countries eased national lockdowns. Image: J.P. Morgan via Isabel.net
- US vaccine protects macaques from Covid-19, studies show Of the 25 vaccinated monkeys, eight showed no detectable signs of being infected, while the rest had only low levels of infection, which showed that the vaccines had induced neutralising antibody responses in the animals, the report said. By comparison, the non-immunised group had much higher viral loads. (…) In the second study, the researchers showed that macaques that had recovered from Covid-19 also developed antibodies to protect against repeat infection.
PANDENOMICS
- First-time jobless claims for the week ending May 16 increased by 2.438 million to bring the total number of Americans who have filed for unemployment benefits to 38.9 million during the past nine weeks. (…) Once one accounts for the initial claims data and those who have lost their jobs but have not qualified for unemployment, are marginally attached or are working part time for economic reasons, the near real-time unemployment rate has reached roughly 29.4%. (…) While the pace of those filing first-time claims has declined for the past seven weeks, the number of individuals filing for unemployment benefits will continue to rise. It is difficult to make a case why that number will now not drive toward 50 million before the economy begins its long and winding road to recovery and expansion. (RSM)
U.S. Flash PMI: May sees further steep fall in output
Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 36.4 in May, up from 27.0 in April, but nonetheless indicating the second-sharpest decline in business activity since the series began in late-2009.
Although the overall contraction in new business eased in May, it was still the second-steepest in the series history. Firms continued to report significant decreases in client demand as customers further postponed the placement of orders.
Service sector and manufacturing firms registered the second-sharpest reductions in new orders since the global financial crisis. Foreign client demand remained especially muted, with new export orders decreasing substantially and at only a slightly reduced rate compared to April as lockdowns associated with the virus pandemic persisted across key export markets.
Reflecting the further severe drop in new business, firms cut workforce numbers at a marked pace in May. The rate of job losses eased from April, but was nonetheless the second-fastest in the 11-year survey history. Manufacturers and service providers recorded similar rates of decline as a lack of new work led to increased reports of lay-offs and lower working hours. Subsequently, spare capacity rose and backlogs of work continued to fall.
Businesses remained pessimistic towards the outlook for output over the coming year as the pandemic’s impact was extended. Although some became more confident of a pick-up in the later stages of the year, helping lift the survey’s future expectations index from April’s all-time low, others noted it would take a long time for conditions to normalise.
Weak demand conditions were also reflected in prices data, with both input costs and output charges falling further in May, to register the second-steepest monthly falls since comparable data were first available in 2009. (…)
Markit anticipates that GDP will decline at an annualised rate of around 37% in the second quarter, and it will take the economy two years to regain the pre-pandemic peak.
U.S. Existing Home Sales Drop More Steeply in April
The National Association of Realtors (NAR) reported that sales of existing homes dropped 17.8% (-17.2% y/y) during April to 4.330 million (AR) from 5.270 million in March, which was unrevised. April’s sales were the lowest since July 2011.
Sales of existing single-family homes, which date back to 1968, declined 16.9% (-15.5% y/y) to 3.940 million units, the lowest since December 2011. Sales of condos and co-ops shrank by 26.4% (-3.6% y/y) to 390,000 units, the smallest since the same amount in July 2010 and the lowest since March 2009.
The number of homes on the market declined 19.7% y/y; in April they actually decreased 1.3%, counter to usual seasonal patterns which generally see April with the largest increase in the year.
Home prices were still rising in April, as the median increased 2.2% (+7.4% y/y) to $286,800 after a 3.8% advance in March. The mean sales price was up 1.7% last month (5.4% y/y) to $321,500.
Global COVID-19 Risk Ranges Up to $82 Trillion
From the Centre for Risk Studies analysis of the Economic Impact of Covid-19 via Mishtalk.
- L1: An Optimistic Recovery Path scenario in which pent-up demand fuels a rapid economic recovery with overshoot on the rebound, with short-term results better than currently expected
- L2: Consensus Economic Forecast – the mid-range of forecasts by economic experts, now calling for a slow recovery curve with some period of economic growth before the recovery process
- L3: Pessimistic Outlook of structural damage to the economy and a lengthy period of recession
- L4: Economic Depression Scenario of a long-term recession with the economy tipped into depression, with “worst-case” estimates by economists and negative assumptions such as severe second waves of infection or protectionist politics.
Here’s Bank of America’s revised scenario:
Goldman Sachs:
Globally, we think the coronavirus crisis has pushed the economy into a deep recession. We expect real GDP to contract by 4.1% this year, making 2020 weaker than the year following the Global Financial Crisis. But we believe global economic activity has now bottomed, and expect a strong sequential recovery in advanced economies in 2H 2020, assuming infection rates don’t reaccelerate sharply as economies begin to reopen, prompting the reimposition of control measures.
In the US, we expect -39% qoq annualized real GDP growth in Q2 before a faster-than-usual recovery in 2H following the lifting of physical constraints on economic activity, leaving full-year 2020 growth at -6.5%. We see unemployment peaking at 25% and expect a decline in core PCE inflation to just below 1% by year-end 2020. We see risks to our forecasts in both directions; on the upside, China’s experience suggests a much quicker pace of recovery is possible, but on the downside prolonged weakness could cause severe scarring effects that delay the recovery.
U.S. Treasury Secretary Steven Mnuchin said there was a “strong likelihood” the U.S. will need another stimulus package.
US stimulus efforts stall as Senate adjourns Impasse over House-backed $3tn bill reveals partisan divide over additional economic relief
On Friday, Premier Li Keqiang abandoned the country’s annual gross domestic product target for the first time in more than a quarter-century, citing “factors that are difficult to predict”—most notably the coronavirus pandemic and uncertainties around trade.
Retail sales in the U.K. fell 18.1% on the month, the steepest monthly decline on record, the Office for National Statistics said Friday. Sales at clothing stores, household goods stores and department stores all collapsed, tumbling between 25% and 50%. Online sales grew 18% as Britons stocked up at home for a lockdown that’s still in force. Alcohol sales also rose.
Pandemic-related bankruptcies have increased rapidly over the past month in Japan. Some 174 companies filed for bankruptcy as of May 21 connected to the pandemic, according to Teikoku Databank.
According to the latest Fitch Leveraged Loan Default Index data, the total amount of defaults in this high-risk, high-yielding area of the debt markets at $12.6 billion in May so far, the highest since April 2014, bringing the leveraged loan default total for the year to date is $33.3 billion. (…) US retailers have accounted for the bulk of defaults over the past two months, as they were forced to temporarily close stores in response to the COVID-19 pandemic. For now, energy remains in 5th spot after the telecom, services, and manufacturing sectors. (…) Larry Fink who runs the $7.5 trillion Blackrock, said that bankers told him they “expect a cascade of bankruptcies to hit the American economy.” (ZH)
More from Fitch:
Since March, most sectors have seen the percentage of negative rating outlooks increase by multiples, with financial institutions experiencing the greatest increase in outlook revisions to Negative from Stable with 38.1% of issuers on Negative Rating Outlook as of May 15 versus 10.7% on March 1.
By comparison, 22.5% of corporate issuers have Negative Rating Outlooks as of May 15 versus 9.8% on March 1. For sovereigns, IPF and USPF/Infrastructure, the proportion on Negative Outlook is now 27.1%, 13.5% and 9.6%, respectively. The percentage of Positive Outlooks has also fallen during this period.
- Millions of PPP Loan-Forgiveness Requests Are About to Rain on Banks The program allows every borrower to request forgiveness.
Forbearance Programs Will Camouflage Weakening Bank Asset Quality
Asset quality for U.S. banks is expected to deteriorate significantly as a result of the coronavirus pandemic, but it could take some time for the true impact to show on bank financial statements, according to a dashboard report from Fitch Ratings. The ultimate increase in nonperforming loans and credit losses from the recession will be difficult to determine due to forbearance programs and measures taken by lawmakers and bank regulators to support credit availability.
Reporting standards for banks have been relaxed under the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which means that impaired loans and troubled debt restructures (TDRs) could be understated in the near term. Fitch expects that recognition of impaired loans to be delayed for several quarters, potentially into 2021, depending on the duration of forbearance programs.
Asset quality for U.S. banks has been stellar in recent years with low levels of nonperforming loans and credit losses, but asset quality will weaken significantly. Nonperforming loans made up less than 1% of total banking sector loans at the end of 2019 compared with over 5% at their peak following the global financial crisis of 2008-2009. (…)
Bank earnings were hampered in 1Q20 due to significantly higher provisions expenses that were about five times provisions expenses incurred in 4Q19. These provisions reflect increases in credit loss expectations as a result of the coronavirus pandemic under the new current expected credit loss (CECL) accounting standard that most large banks adopted in 1Q20. Under CECL, banks are required to estimate life of loan losses using their own assumptions such as economic forecasts and credit exposures. Provisions expenses and allowance coverage can vary greatly, and differing underlying assumptions result in a lack of comparability from bank to bank.
Forbearance programs could artificially inflate bank earnings in the coming quarters because banks can generally continue to accrue interest on loans subject to forbearance if the borrower was current on their obligations when forbearance was granted. If the borrower is not able to repay when the forbearance period ends, banks could incur a loss that was not reported in earlier quarters. (…)
Record Reserves for Bad Loans Poised to Slash Canada Bank Profit
Companies Confront the Unforgiving Economics of Coronavirus
Facing higher costs to keep workers and customers safe and an indefinite period of suppressed demand, businesses are navigating an ever-narrower path to profitability. To make the math work, some businesses are cutting services and jobs. Others are raising prices, including imposing coronavirus-related fees aimed at getting customers to share some of the expenses.
Walmart, Target and Home Depot this week said they absorbed more than $2 billion combined in added expenses for wages, bonuses and other benefits for workers during the early months of the pandemic. McDonald’s laid out conditions for franchisees to reopen their dining rooms that include cleaning bathrooms every half-hour and digital kiosks after every order. (…)
Prices of food and other items have risen. Employees need protective equipment at work. Rising unemployment, safety concerns and limits on the number of customers a business is allowed to serve are setting a cap on sales. (…) new procedures mean that employees must spend 25% more time on cleaning. (…)
- One final insight from our annual Fortune 500 CEO poll: We asked the CEOs where in the world they saw the best opportunities to invest. Seventy-five percent of them said the U.S. was still number one on their list—the same as last year. Only 10% said China was the best place to invest—roughly the same as last year’s 11 percent. (Fortune)
PANDEMONIUM
China Dares Trump to Hit Back With Hong Kong Power Grab
(…) China confirmed on Friday that it would effectively bypass the city’s legislature to implement national security laws, which have long been resisted by residents who fear they will erode freedoms of speech, assembly and the press. (…)
For Xi, the move allows Beijing to reassert dominance over a piece of Chinese territory where his government was rendered impotent during sometimes-violent protests last year. Facing rising unemployment in the mainland due to the Covid-19 outbreak and the potential for a big loss in Hong Kong legislative elections set for September, the Communist Party decided it had more to gain by acting decisively to stem any potential threats. (…)
The move risks triggering yet another round of tit-for-tat escalation between the U.S. and China, which have seen ties spiral to their worst in decades since Covid-19 began spreading around the world. From supply chains and visas to cyberspace and Taiwan, the world’s two largest economies are poised for confrontation on a number of fronts as both Xi and Trump seek to win over domestic constituencies looking for someone to blame for a deterioration in living standards.
(…) on Thursday [Trump] said the U.S. would react “very strongly” if China pushed ahead with the national security legislation in Hong Kong. (…)
But the biggest risk for Xi is still unemployment at home. With lots of young people out of work on the mainland, the last thing the Communist Party wants is a revival of violent Hong Kong protests, Zweig said.
“They feel at threat, at risk, and therefore they’re doing it,” he said. “Maybe five or six months ago, they were feeling okay. But I think a lot of stuff’s come crashing down.”
- U.S. senators from both parties began drafting legislation to sanction Chinese officials and entities involved in enforcing the new national-security laws in Hong Kong and punish any banks doing business with them—a move that could snarl China’s financial system.
U.S. strikes at a Huawei prize: chip juggernaut HiSilicon
The latest U.S. government action against China’s Huawei takes direct aim at the company’s HiSilicon chip division—a business that in a few short years has become central to China’s ambitions in semiconductor technology but will now lose access to tools that are central to its success.
That could make it the most damaging U.S. attack yet against a Chinese company that U.S. officials told reporters Wednesday functioned as a “tool of strategic influence” for the Chinese Communist Party. Huawei Technologies Co Ltd for its part denounced the U.S. allegations and called the new measures “arbitrary and pernicious.” (…)
HiSilicon’s Kirin smartphone processor is now considered to be on par with those created by Apple Inc (AAPL.O) and Qualcomm Inc (QCOM.O) —a rare example of an advanced Chinese semiconductor product that competes globally.
HiSilicon is also central to Huawei’s leadership in 5G, stepping into the breach when the United States cut off access to some U.S. chips last year.
In March, Huawei revealed that 8% of the 50,000 5G base stations it sold in 2019 came with no U.S. technology, using HiSilicon chipsets instead. (…)
With the new restrictions，HiSilicon “will be in a situation where they’re not able to manufacture chips at all, or if they do, then they’re not leading edge anymore,” says Stewart Randall, who tracks China’s chip industry at Shanghai-based consultancy Intralink.
Without its own processors, Huawei will lose its edge over domestic smartphone rivals, analysts said. International sales had already been gutted by a ban on the use of key Google software. (…)
U.K. PM Boris Johnson orders plans to end reliance on Chinese imports: report
British Prime Minister Boris Johnson has instructed civil servants to make plans to end Britain’s reliance on China for vital medical supplies and other strategic imports in light of the novel coronavirus outbreak, The Times newspaper reported on Friday.
The plans, which have been code-named “Project Defend,” include identifying Britain’s main economic vulnerabilities to potentially hostile foreign governments as part of a broader new approach to national security, the newspaper reported, adding that the efforts are being led by Foreign Secretary Dominic Raab. (…)
China urged to diversify soybean sources to curb reliance on US
EARNINGS WATCH
We have 471 reports in for a blended decline of -12.3% in Q1 earnings with revenues down 1.1%. Q2 estimates are now at -42.3% while Q3 and Q4 are -24.4% and -12.8% respectively.
Trailing EPS are now $158.87, full year $125.85, 12-m forward $128.95 and full year 2021 $164.15.