Today’s Big Picture

Equity markets in Asia closed higher on the day with markets in Hong Kong and South Korea closed for holidays. Favorable March quarter earnings last night paired with the April China Beige Book, which noted 91% of Chinese companies resumed operations by late April with 4% operating at full capacity, along with some better than expected economic data out of Japan - see today’s Data Download for more on that. European equities were down across the board ahead of this morning’s US weekly Jobless Claims Report, while US futures were mixed with the Dow and S&P 500 futures down 0.65%-0.7% vs. Nasdaq futures up slightly.

This morning’s weekly Unemployment Insurance Weekly Claims saw an additional 3.839 million initial claims for the week ending April 25. The previous week’s level was increased by 15,000 to 4.442 million. Over the past six weeks, 30.3 million jobs have been lost which is 3.5 times the total number lost during the Great Recession and 18.4% of the civilian labor force as of February 2020. The advance number of actual initial claims under state programs was 3.489 million.

Data Download

Coronavirus

There are now over 3.2 million confirmed cases of coronavirus worldwide, and by today over 230,000 lives will have been lost to it. In the US, there are more than 1.06 million cases, and nearly 62,000 people have lost their lives, more than the worst flu season in the US over the past ten years, which was estimated by the CDC to have seen 61,000 lives lost . This comes even after much of the nation has been in lockdown, and with over 2,000 additional lives lost every day, this is nowhere near the worst of the flu bugs.

We can now add a dog to the list of animals testing positive for the coronavirus. A pug named Winston in North Carolina tested positive for the virus after three members of his human family all tested positive. The family has two dogs, a cat, and a lizard. So far, Winston is the only-non human to have tested positive. Dad works in an emergency room.

Los Angeles Mayor Eric Garcetti announced last night that all city residents are eligible for free COVID-19 testing. This is a first for any major city in the US, coming after the announcement that LA County saw 1,541 new cases yesterday, nearly 1,000 more than the previous day, pushing the county’s infection count to over 22,400.

There are currently more than ninety vaccines being developed for SARS-CoV-2 by research teams all over the world. At least six groups have already begun human trials, while others have started testing animals. More than 70% of the groups leading vaccine research efforts are from the private sector. In North America, there are over 35 groups. China, Europe, and Asia each have around 13 groups.

More than seven teams are working on vaccines that use the virus itself in a weakened or inactivated form, similar to how vaccines for measles and polio work. Sinovac Biotech in Beijing is working on a vaccine using this method.

There are around twenty-five groups working on viral-vector vaccines, which is the type used to create the newly approved Ebola vaccine. This uses a genetically engineered measles or adenovirus to produce coronavirus proteins in the body.

Around twenty teams are using DNA or RNA for a coronavirus protein to prompt an immune response. So far, no licensed vaccines use this technology, but they are safe and easy to develop.

Approximately 28 teams of researches are using protein-based vaccines, which would inject the coronavirus proteins directly into the body. Similar vaccines against the SARS virus have been found to provide monkeys with protection, but have not yet been tested in people.

Five teams are working on virus-like particle (VLP) vaccines which could be used to trigger a strong immune response, but are difficult to manufacture.

International Economy

The International Energy Agency on Thursday forecast global energy demand will fall 6% this year , the largest percentage decline in 70 years. The IEA said oil demand could drop by 9%, returning oil consumption to 2012 levels, and coal demand could decline by 8%. Global electricity demand is forecast to fall by 5%.

Retail sales in Japan contracted 4.6% YoY in March, less than the 4.7% expected, but the fifth contraction in the past six months. Industrial Production contracted 5.2% YoY, the thirteenth contraction in the past sixteen months. Consumer Confidence dropped to 21.6 in April from the prior 30.9, the lowest on record with the series going back to 1982. Housing Starts contracted 7.6% YoY in March and has been in contraction for 13 of the past 39 months and 11 of the past 12. Construction Orders also paint a bleak picture, contraction 14.3% YoY, down in 9 of the past 12 months.

In China, the official NBS Manufacturing PMI dropped to 50.8 in April from 52 in March, versus expectations for 51. This is the second month of growth after the fall to 35.7 in February - anything above 50 indicates expansion. The official data coming out of China paint a picture of a nation that suffered one really bad month but has since been humming along as if nothing awful happened in February. Same thing for Non-Manufacturing, which rose to 53.2 from 52.3 in March after dropping below 30 in March. The Caixin Manufacturing PMI is a bit less rosy, dropping to 49.4 in April from 50.1 in March versus expectations for an increase to 50.3. It had dropped to 40.3 in February. This doesn’t bode well for expectations of a V-shaped recovery.

The 19-country euro-area economy experienced the worst contraction in its history, falling 3.8% QoQ (14.4% annualized) in Q1 2020 - for reference, the US contracted 4.8% annualized which we discuss further below. Q2 is likely to see much more severe contractions.

France Q1 contracted 5.8% QoQ (21.3% annualized), far worse than the 3.5% contraction expected

Spain Q1 contracted 5.2% QoQ (19.2% annualized)

Italy Q1 contracted 4.7% QoQ (17.5% annualized)

Further weakness in the euro-area & UK:

Germany retail sales fell 2.8% YoY in March, and its unemployment rate rose to 5.8% in April from the prior 5%, higher than the expected increase to 5.2%

Eurozone Unemployment rate of 7.4% in March

Later today, we will get the European Central Bank’s interest rate decision, which is expected to keep the benchmark lending rate at 0% and its deposit facility rate at -0.5%.

Domestic Economy

Yesterday the Federal Reserve Open Market Committee reiterated its commitment to support the economy using any tools and to keep the Fed funds rate near zero until the economy is back on track for maximum employment and price stability. The Fed also said it would continue its Treasury and agency security purchases to support liquidity as needed. It did not update its forward guidance, but chair Powell did say that the next payroll report is likely to show double-digit unemployment rate, and second-quarter growth will decline at an “unprecedented rate.” When asked if the Fed will likely need to do more, his answer was, “yes.”

The Fed’s balance sheet has increased from less than $4 trillion at the end of 2019 to $6.5 trillion - an increase of over 63%, mostly through the purchase of US Treasuries and mortgage-backed securities. On top of this, Congress has provided record-levels of fiscal stimulus, including:

$2.3 trillion CARES Act (Coronavirus Aid, Relief and Economy Security Act)

$484 billion Paycheck Protection Program (PPP) and Health Care Enhancement Act

$192 billion Families First Coronavirus Response Act

$8.3 billion Coronavirus Preparedness and Response Supplemental Appropriates Act

Putting that all together, you get $6.5 trillion in the stimulus or over 30.4% of 2019 GDP, and this year's GDP is expected to be less than last year. The Fed continues to expand its balance sheet, and Congress is nowhere near finished spending, so we are talking about the stimulus that will be way over 50% of GDP, and that’s on top of the usual federal government spending which has been around 38% of GDP for the past five years.

Yesterday we also learned that the economy contracted 4.8% annualized in Q1, which is the first contraction since 2014 and the worst since the Great Financial Crisis. Given that stay-at-home orders were only enacted in March, Q2, as Fed Chair Powell said, is likely to contract as an “unprecedented rate.” Despite this, the S&P 500 has recovered around 60% of the decline from March with momentum trending upward.

Today’s March Personal Income & Spending report revealed personal spending fell 7.5%, worse than the expected 3.6% decline put forth by Briefing.com while personal income for March fell 2.0% vs +0.6% in February. March PCE Prices fell 0.3% with Core Prices down 0.1% vs. +0.2% in February. As readers digest these figures, we’d note the drop in personal spending reflects roughly three weeks of pandemic related pain, which suggests we will see further declines in April. Preliminary data tallied from US states that have started to re-open their economies at this time point to a modest uptick in spending for May but your authors will continue to monitor such data as it is made available. Later today will bring the April Chicago PMI, and the weekly EIA Natural Gas Stocks.

Markets

Yesterday the markets were in a bullish mood thanks to the good news that Gilead Science’s (GILD) remdesivir looks to be having a material impact on shortening recovery times for Covid-19 patients in trials. Even Dr. Fauci told reporters that the treatment “has a clear-cut, significant positive effect in diminishing the time to recovery.” Great news! The Dow rose 2.2%, the S&P 500 2.7%, and the Nasdaq rose a whopping 3.6%. Amazing that the market can be so bullish on the same day, we learn that Q1 saw the biggest economic contraction since the Great Recession with Q2 on track to be even worse - all that stimulus is at least impacting the markets.

Adding to the overall more bullish sentiment, despite the dour economic performance in Q1, is the improvements in the oil markets with WTI gaining over 16% on the news that production cuts are starting to put a dent in the supply glut with yesterday’s EIA data showing US inventories rose by 9 million barrels last week, less than the expected 11 million barrel build.

With the Fed assuring the markets that more easing is available on top of the federal government spending spree, gold is on pace for its best monthly performance in April in four years.

Stocks to Watch

American Airlines (AAL) reported a March quarter loss of $2.65 per share, $0.29 below the consensus forecast with revenue for the quarter dropping almost 20% YoY. The company has reduced its system capacity by approximately 80% in both April and May, and 70% for June. American’s average estimated second-quarter 2020 cash burn rate is expected to be approximately $70 million per day but targets reducing that to approximately $50 million per day for June.

Bottom-line results for the March quarter at Kraft Heinz (KHC) beat consensus expectations while revenue rose 3.3% YoY to match consensus forecasts. Organic net sales for the quarter increased 6.2% YoY due to approximately 6%-7% points of growth associated with increased consumer demand related to the COVID-19 pandemic. For the current quarter, the company sees “incremental demand from retail customers due to an increase in at-home consumption, particularly in developed markets, as well as reduced demand in foodservice channels on a global basis.”

Comcast (CMCSA) delivered better than expected March quarter EPS on revenue that matched consensus expectations. While the company has seen a 33% increase in its upstream traffic since March 1 and a 40% increase in wireless data usage over WiFi since March 1, it shared expectations for “the impacts of COVID-19 to increase in significance in the second quarter 2020 and to have a material adverse impact on consolidated results of operations over the near-to-medium term.” Tucked inside the company’s quarter are segment results that will not shock many - High-speed Internet rose 9.3% YoY; Video was flat YoY; Voice fell 9.2% YoY, and Wireless rose 52% YoY. Of note, total High-Speed Internet Customer Net Additions were 477,000 during the quarter, its best quarterly result in 12 years.

March quarter revenue at Twitter (TWTR) rose 2.6% YoY, topping expectations but its bottom line missed the Wall Street consensus by $0.12 per share. While the company is not providing quarterly revenue or operating income guidance for the current quarter, we look forward to the company’s earnings conference call where it will discuss current user engagement levels as well as advertising demand trends. Average monetizable daily active users were 166 million for the March quarter vs. 134 million in the year-ago quarter and 152 million exiting 2019.

McDonald's (MCD) reported mixed March quarter results with revenue topping consensus expectations while its bottom line missed the consensus forecast. Systemwide sales fell 4% during the quarter with global comparable sales down 3.4%. Exiting the month of April, 99% of the company’s US locations are up and running Drive-thru, Delivery, & Take-away only; 45% in its International company-owned locations and 80% in its International licensed locations. In sum, 75% of McDonald’s restaurants are up and running in one form or another. China has resumed operations in 99% of restaurants, although the market continues to experience a reduced level of demand as consumers have not fully returned to their pre-COVID routines. McDonald’s previously withdrew its 2020 guidance and it will hold an earnings-related conference call at 8:30 AM ET this morning.

Hanesbrands’ (HBI) reported March quarter results that missed expectations for both revenue and EPS and withdrew its current quarter and full-year 2020 outlook. Due to disruptions to retail partner operations, the company’s pandemic response is focused on not only serving channels that are generating sales but also developing a product line of personal protective garments, including face masks, to meet emerging commercial and consumer demand.

Dunkin (DNKN) served up a hot March quarter with revenue and EPS topping expectations. Digging into the company’s results, its US comparable store sales declined 2.0% for the quarter as the growth of 3.5% during the first 10 weeks of the quarter were more than offset by a comparable store sales decline of 19.4% in the last three weeks of the quarter. Dunkin has suspended not only its 2020 guidance and long-term targets but also its regular dividend.

Despite a hefty top-line miss for the March quarter, Royal Dutch Shell (RDS.A) managed to deliver better than expected EPS for the quarter, however, the company slashed its quarterly dividend to $0.16 from $0.47 given demand destruction associated with the current pandemic for oil, gas and related products. This marks the first time Royal Dutch has cut its dividend since WWII.

Tesla (TSLA) shares are trading higher in response to the company’s surprise March quarter profit and better than expected automotive revenue. The company produced 102,672 vehicles during the quarter and delivered 88,496 units, marking its best March quarter ever. Automotive gross margin came in at 25.5% vs. 22.5% in the December quarter and 20.2% in the year-ago quarter. Tesla declined to offer near-term guidance, but on the earnings conference call CEO Elon Musk shared he is looking forward to being a global manufacturer in North America, China, and Europe with a capacity of over 1 million cars next year.

Qualcomm (QCOM) topped expectations for the March quarter and served up guidance for the current quarter that bookended current consensus expectations. Focusing on the company’s smartphone-related business, the coronavirus led handset demand for 3G/4G/5G product to fall 21% YoY in the March quarter. The company expects the overall handset market will be down ~30% in the June quarter but sees no change for its calendar year 2020 5G smartphone forecast.

Microsoft (MSFT) also topped top and bottom-line expectations for the March quarter and guided June quarter revenue to $35.85-$36.8 billion vs. the $36.5 billion consensus. For the March quarter, revenues at the company’s Productivity and Business Processes, Intelligent Cloud, and More Personal Computing segments topped expectations.

Facebook (FB) bested March quarter EPS expectations by $0.01 while its revenue for the quarter rose nearly 18% YoY topping Wall Street consensus expectations. For the quarter, daily active users rose 11% to 1.73 billion vs. the expected 1.7 billion, while monthly active users climbed 10% to 2.6 billion exiting the quarter vs. the expected 2.55 billion. And while engagement was up, Facebook noted a “significant reduction in the demand for advertising, as well as a related decline in the pricing of our ads" over the last three weeks of the quarter. While the company withdrew its formal 2020 guidance, it has seen signs of stability during the first three weeks of April with advertising revenue for the month approximately flat YoY.

Wynn Resorts (WYNN) CEO Matthew Maddox during White House meeting says casinos could reopen by Memorial Day

After today’s market close, investors will be faced with a bevy of corporate earnings reports, but the ones most likely to capture their attention will be the ones from Apple (AAPL), CoreLogic (CLGX), Denny’s (DENN), El Pollo Loco (LOCO), Expedia (EXPE), Gilead Sciences (GILD), Terex (TEX), Visa (V) and Whirlpool (WHR). Investors looking to get the nitty-gritty on those reports and the sea of others to be had later today should visit Nasdaq’s earnings calendar page .

On the Horizon

May 1: US Vehicle Sales May 1: April ISM US Manufacturing Index May 4: April Eurozone Markit Manufacturing PMI May 5: April Eurozone PPI May 5: April US Markit Services PMI May 4: April US ISM Non-Manufacturing Index May 6: April ADP US Employment Report May 6: April Markit Eurozone Composite PMI May 6: March Eurozone Retail Sales May 7: Bank of England interest rate decision May 8: April US Employment Report May 12-14: Google I/O Developer Conference May 25: US stock market closed for Memorial Day



Thought for the Day

“Invention is by its very nature disruptive. If you want to be understood at all times, then don’t do anything new.” ~ Jeff Bezos

Disclosures

McDonald’s (MCD), Microsoft (MSFT), Qualcomm (QCOM), Visa (V) are constituents in the Tematica Research's Thematic Dividend All-Stars Index .

. Tesla (TSLA) is a constituent in the Tematica Research’s Cleaner Living Index .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.