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Doubts of a Perfect Recovery Emerge: Dow -900

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Thursday, June 11, 2020

Pre-markets this morning have sunk deeper into the red, falling hundreds of points since the already-low overnight markets and spot oil prices coming down hard. New jobless claims and PPI data add to the mix, and while neither was terrible — in a relative respect — neither did they staunch the bleeding.

Initial Jobless Claims came down again, for the 10th week in a row, to a headline 1.542 million new claims in the past week. This follows a revised 1.897 million the previous week, and well down from the 6.87 million reported back in the last week of March, which will hopefully remain an all-time record low. Continuing Claims, coming in for the week previous to last, lowered a bit to 21.268 million from 21.487 million reported the week before that.

With the reopening of America, lots of the country’s labor force is going back to work. Especially with summer temperatures entering people’s lives, outdoor activities are playing a bigger part. After 3 months locked indoors (mostly), it feels like freedom.

However, increased COVID-19 cases in certain states that reopened sooner than others, such as Texas, are sewing seeds of doubt that this economic recovery will continue unabated. And after weeks of an unadorned bull rally taking over the stock market, this morning’s pullback — now 900 points on the Dow — looks something like a rude awakening.

Yesterday’s appearance by Fed Chair Jay Powell, initially absorbed by the markets as purely good news — accommodative interest rates and bond purchases for the next 2+ years — seem to have gotten a re-think going into yesterday’s close and now this morning. If the Fed’s policies must remain a crutch for the economy for the next 30 months or more, then how strong is this recovery, really? Does it justify record-high valuations such as we’ve seen in tech companies like Microsoft (MSFT - Free Report) and Apple (AAPL - Free Report) , among others?

The May Producer Price Index (PPI) came out this morning as well, surprising to the upside with a headline of +0.4% from expectations of +0.1% and an unrevised -1.3% (the lowest since the Great Recession of 2009) for April. Take a peek at the “core” headline — minus volatile food and energy costs — and we see this number slip to -0.1%, indicating PPI growth has come almost exclusively from food prices (+6%) and energy (+4.5%).

Things are reversed a bit when we look at year-over-year PPI numbers: -0.8% on the headline — due exclusively to the “shelter in place” lockdown of the economy that kept people at home and money in their pockets — and +0.3% on core. Consider that we had an economy rolling along well in the wake of a phase-one trade agreement with China in January and employment numbers at or near 50-year highs to understand how producer pricing control could still be positive from a year ago. Here’s hoping we stabilize back on that trajectory in the near future.

The dovish Fed may have also negatively impacted oil prices this morning, which are also falling fast after a couple weeks of robust growth. The West Texas Intermediate index (WTI) is down 7% in the pre-market on new high crude inventories, with the Brent down 6%. Again, without our economy reopening to perfection, oil prices are likely to remain perilous, even with OPEC+ curbing overall production.

Mark Vickery
Senior Editor

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