Another Dreadful Week, Except for Oil

By Matthew Klein |  Friday, April 3

Blood and Oil. Another wild week in markets has come to a close. Stocks were down across the world, with the Dow Jones Industrial Average shedding 2.7% over the week and 1.7% today.

Interest rates were also lower, with the U.S. 10-year Treasury note dropping to just 0.59%. The yield on the two-year note hit 0.21% -- its lowest level since May 2, 2013. The U.S. dollar, meanwhile, continued to rise, gaining 2% this week. The greenback is now up more than 6% since the start of the year.

The abysmal jobs numbers -- and they were truly awful -- probably weren’t to blame for these risk-off moves. Why? Because as bad as they look, everyone knows they are nearly three weeks out of date. We already knew that 10 million Americans had filed for unemployment benefits in the two weeks ended March 28, so a survey conducted the week of March 12 showing 700,000 more jobs were lost than added is simply not news.

The coronavirus downturn is unprecedented in its speed and its severity, so lots of data points that used to be timely won’t be as helpful for investors this time around. The absolutely massive 3.4% monthly drop in employment at bars and restaurants, for example, does not remotely reflect current conditions, which are orders of magnitude worse. Most Americans stopped going out to eat or drink weeks ago, but that won’t show up in the data until the Bureau of Labor Statistics does its April survey in the next couple of weeks.

If the job numbers weren’t the issue, what might explain the bad news?

One possibility is China. Since the novel coronavirus originated in Wuhan, China has had the dubious privilege of experiencing everything the rest of us will go through first. China’s economy crashed in February, just as the U.S. and Europe are crashing now. But the Chinese government now claims it has succeeded in stopping the spread of the virus and many of the tight restrictions imposed in January and February have been lifted.

So it’s worth emphasizing that the Chinese economy was still shrinking in March. The latest reading of the Caixin China General Services PMI was just 43. Anything below 50 implies falling economic activity, which means everything from restaurants to construction to dentists was still doing worse at the end of March than at the end of February – despite the apparent containment of the viral outbreak. At this point, anyone still forecasting a rapid snap-back in economic activity in the rest of the world is delusional.

It wasn’t all bad news in the markets, however: Oil was up big. The price of near-term futures of West Texas Intermediate crude oil jumped 32% this week, to $28.34 a barrel, following reports of a possible deal between the three biggest producers (the U.S., Saudi Arabia, and Russia) to limit supply. This week’s price gain is the biggest one-week increase since at least 1983. Brent crude oil, the international benchmark, is up 22% over last week -- and up 50% over the last three trading sessions.

Be sure to read Avi Salzman's interview with Texas Railroad Commissioner Ryan Sitton for more on how a deal could work.

The gains in oil drove many of the biggest winners in U.S. large-cap stocks today, including Apache, Diamondback Energy, Devon Energy, Marathon Oil, EOG Resources, and Cabot Oil & Gas, although the energy sector as a whole was down for the day.

Next week’s biggest data release is going to be Thursday’s count of how many Americans filed initial claims for unemployment insurance benefits. Nobody knows how bad things will get, but Ben Walsh and I were discussing the recent progression and came up with a baseline forecast of 9.9 million. After all, this week’s number was 6.6 million, up from 3.3 million last week. Another sequence-based forecasting approach implies next week's number would be even higher, at 13.2 million.