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Morning Notes — Crude, Credit Spreads, Jobs and the Retest

Crude, Credit Spreads, Jobs and the Retest

April 3, 2020

Crude: OPEC+ will hold an emergency meeting Monday, but the probability of anything close to a 10M barrel per day cut remains low. Russia’s willingness to cut if the US and Saudis also cut, suggests US shale production was probably the biggest reason Russia refused to agree to a cut at the March 5-6 OPEC+ meeting. Russia and Saudi Arabia know there are US laws prohibiting non-competitive behavior, which is why the probability for a cut remains low. But these are unusual times and an agreement of some kind is still possible. It’s enough to start a short-squeeze in crude prices, but probably not to levels where US shale production becomes economically desirable. And supply is only half of the pricing equation.

Credit spreads: In a normal demand environment, lower crude supply would result in higher prices and less pressure on high yield borrowers in the Energy sector. Energy companies are the largest issuer of high yield debt, so higher crude prices help narrow credit spreads and reduce funding stress in the economy. Lower gasoline prices are only good for an economy with strong aggregate demand. Recent monetary and fiscal stimulus measures are there to keep the pilot light of aggregate demand lit until containment efforts can be eased. Let’s hope that’s soon.

Jobs: Today’s larger than expected -701,000 decline in March payrolls was heavily concentrated in leisure and hospitality. Private payrolls within ‘food and drinking places’ (a subset of leisure and hospitality) alone accounted for a decline of -417,000. The weekly jobless claims data is almost all hospitality and leisure as the stigma for workers to file unemployment has been dissolved by the nature of the disruption. I’m guessing the vast majority of these jobs will be there when containment efforts ease.

SPX: A successful retest of the 3/23 low still seems like the most likely near term path for the SPX. The massive stimulus effort to date is a powerful backstop for markets. A successful retest that comes from narrowing credit spreads (more stable crude prices would help) could be enough to get the SPX through technical resistance at ~2630, but the index will need improving coronavirus headlines to get much further.

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