Monday Musings: May 4, 2020

May 04, 2020

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Public Trust Credit Team
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Economic data continues to a paint gloomy outlook for the United States economy

Last Wednesday, the U.S. reported Q1 GDP of -4.8% on an annualized basis, meaningfully below survey of -4.0% and marking the fastest pace of quarterly contraction since 2008. Initial jobless claims added another 3.8 million bringing the yearly total to over 30 million, representing approximately 20% of the U.S. workforce. ISM manufacturing printed above survey but remained steeply in contractionary territory at 41.5 for April, down all the way from 50.9 at the start of the year. Consumer confidence is an absolute free fall with the Conference Board Consumer Confidence print coming in at 86.9, a sharp decline from February’s high of 130.4. Last week’s FOMC meeting came and went with no major surprises as the Fed left the Federal funds target range unchanged at 0.00% – 0.25%, signaling that rates will remain on hold until there is evidence to suggest the economy is back on track. This week’s economic data is unlikely to offer any optimism as the survey estimate for the U.S. unemployment rate currently stands at 16% for April. Services PMI and ISM non-manufacturing for the month of April will also be released this week and are expected to come in at decade-low levels.

Q1 earnings are better than expected, but companies signal strong warnings about Q2

About 68% of the U.S. IG index have reported earnings so far, and companies are on track for -14% year-over-year earnings decline and -0.4% revenue decline. Surprisingly, the companies that have already reported have averaged a 3.5% earnings surprise, signaling that the quarter was not as bad as consensus had expected. However, the tone on earnings calls was cautious, and nearly every company has withdrawn full-year and Q2 guidance. Across the board, companies are cutting costs, freezing hiring, and suspending buybacks while tempering expectations for Q2 saying it is likely to be much worse. Fortunately, the response by companies has been to shift more risk to equity holders through buyback suspensions to help their credit ratings with many high-quality issuers having gone to market with the goal of building up liquidity and cash balances.

Gilead Sciences receives emergency use authorization from the U.S. Food and Drug Administration for its COVID-19 therapy drug

Last Friday, the U.S. Food and Drug Administration (FDA) provided emergency use authorization (EUA) for Remdesivir to treat severe cases of COVID-19. Remdesivir is currently the only approved drug therapy in the battle to treat COVID-19. The decision from the FDA for EUA is largely based on the placebo-controlled Phase 3 study for patients with severe COVID-19 which was sponsored by the National Institute for Allergy and Infectious Diseases (NIAID), a segment of the National Institutes of Health (NIH). Last week, the NIAID reported preliminary results from the trial indicating a 31% faster recovery time for patients who received Remdesivir than those who received a placebo. The data shows that the median time for recovery was 11 days for Remdesivir treated patients versus 15 days for those that received a placebo. The NIAID sponsored trial began on February 21 with EUA authorization on May 1, a remarkable time for fast-tracked approval.
 
Additionally, Gilead announced the results from the company’s Phase 3 SIMPLE trial evaluating five-day and  ten-day dosages for patients with severe COVID-19. Data provided reveal patients that received a ten-day treatment of Remdesivir had similar improvement compared to those that received the five-day treatment. By working with global partners, Gilead has been ramping up manufacturing of Remdesivir; they will donate 1.5 million individual doses that will equate to more than 140k treatment courses (assuming a ten-day treatment course). Gilead anticipates producing a minimum of 500k treatment courses by early October and 1 million by December of this year. 
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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