4 to 10 May: April jobs report paints a bleak picture of the US labour market

The latest jobs report in the US highlighted the enormous economic damage brought about by the coronavirus. In April, 20.5 million jobs were shed in the US economy, which in turn translated into a sharp increase in the unemployment rate, to 14.7% (vs. 4.4% in March). The jobless rate eclipsed the previous record of 10.8% registered during the Great Depression. The survey also showed a large number of workers who said they were ‘employed but absent from work,’ i.e. temporarily laid off, which does not show up in official statistics. To mitigate the longer-term impact of the economic shutdown, some states have already started to reopen with restrictions (e.g. South Carolina, Georgia, Texas, etc.). PMIs in the US signalled that the economic damage in 2Q20 would likely be larger than in the first quarter, as the Markit Composite PMI index (incorporating both manufacturing and services) fell to 27 in April, vs 40.9.

Rising stock indices in the US are in stark contrast with actual economic datapoints. In our opinion, the phenomenon can be explained by investors’ confidence in the Fed and the Trump administration, that the economic rescue packages are large and comprehensive enough to see a quick and pronounced economic recovery in the US. New data releases (April retail sales and industrial production) this week will help sense check the market’s hypothesis.

27 April to 3 May: Central banks to continue to aid the ailing global economy

Last week we got to know the initial impact of social distancing, lockdowns and business closures on the developed economies. Real GDP in the US contracted 4.8% in annualised terms in 1Q20, as both consumer spending and investment activity significantly weakened. Meanwhile, real GDP in the Euro Area fell 3.3% YoY. From a country standpoint, Spanish GDP contracted 4.1% YoY, Italy’s GDP declined 4.8% YoY, whilst the French metric decreased 5.4% YoY. The figures by Germany and the UK are yet to be released. Forward-looking indicators, such as the ISM in the US or PMIs in Europe, painted a very gloomy picture in our view, suggesting that economic activity in the developed world could significantly further weaken in 2Q20.

Central bankers spoke up during the week after their scheduled monetary policy meetings. Fed Chair Powell said that the FOMC would keep the Fed funds target range at 0.00-0.25% until the Committee was confident that the economy had ‘weathered recent events’ and added that the FOMC would ‘not be in any hurry.’ ECB President Lagarde announced a new series of pandemic emergency longer-term refinancing operations to support liquidity conditions and to provide a liquidity backstop to banks, whilst keeping the key policy rates stable and asset purchases running. The Bank of Japan continued to add layers of policy supports for the economy by maintaining a broad scope for asset purchases. Therefore, all three major central banks reiterated their intention to provide as much support as possible.

Despite central bankers’ efforts to calm financial markets and smooth asset price volatility by extending and expanding the range of monetary support, investors may face a challenging week, as the US administration released hawkish comments on China on Sunday. US Secretary of State Mike Pompeo said there was ‘a significant amount of evidence’ that the new coronavirus emerged from a Chinese laboratory. However, the State Secretary did not provide evidence. In our view, Mr. Pompeo’s comments, with a suggestion from the POTUS that he would impose tariffs on China because of the pandemic, do not support the recovery of global investor sentiment. On Friday, the April US jobs report will be released, which is expected to show an unprecedented increase in the number of jobs lost and a skyrocketing unemployment rate.

20 to 26 April: Gauging the state of the world economy in a pandemic

As the coronavirus outbreak caused outages in factories and reduced household and business spending globally, it is probably not too surprising that the CPB’s World Trade Monitor reported global trade volumes declining 2.6% YoY and industrial production falling 3.9% YoY in February. Despite the very sharp decline in volumes, the full extent of the coronavirus’ adverse impact is still not reflected in these figures. As opposed to hard data (such as trade or industrial activity), PMIs do not lag as much. April composite PMIs in developed economies fell to the lowest levels in the history of the respective series: to 12.9 in the UK, 13.5 in the Eurozone, 27.4 in the US and 27.8 in Japan. Consequently, the extent of the weakness in economic activity exceeded the decline seen during the GFC in 2008-09, according to the composite PMIs.

Looking forward, three systemically important central banks hold policy meetings this week — the Federal Reserve, the Bank of Japan and the European Central Bank. Investors will be keen to know how central bankers view the economic outlook and, especially, the future of existing and additional policy actions. Furthermore, we will get the first glimpse of the 1Q20 GDP data from the US. According to the median market estimate (at the time of writing on Monday), the US’ economy could have shrunk 3.9% on an annualised basis, which would not be as dreadful as the 8.4% contraction in 4Q08. However, the sudden economic stop brought about by the coronavirus is an unprecedented phenomenon, which means that nobody really knows how to produce a reliable estimate. This extreme degree of uncertainty is also reflected by the unusually wide range of GDP growth forecasts between -1% and -10%.

14 to 19 April: Earnings season and PMIs to drive global markets

Policymakers globally kept working on schemes to bolster their respective economies debilitated by the nCovid-19 pandemic. In the US, House Speaker Pelosi and Treasury Secretary Mnuchin were optimistic about reaching a deal to top up funds in a loan programme aimed at helping small businesses stay afloat. In the Euro Area, central bank officials have held early talks with the European Commission on setting up a Eurozone bad bank that would take billions of euros in debt off banks’ balance sheets (according to the Financial Times’ report). Meanwhile, in China, the government announced it was selling another CNY 1tn (about USD 141.3bn) in bonds to ramp up payments for stimulus spending.

Oil prices extended their slide, falling to the lowest in more than two decades, as output cuts promises left investors unconvinced so far that the demand-supply imbalance could subside in the near term. In addition, crude oil storage capacity is quickly running out, according to the latest reports. As a result, WTI futures for May delivery fell to around USD 15/bbl (at the time of writing on Monday morning).

Looking forward, earnings season will provide investors with a look at just how much the pandemic has impacted businesses, as the global economic diary remains relatively empty for the week. In our view, there are two relevant macro datapoints this week: PMIs will be released for developed countries (including the US, Euro Area and the UK) and South Korea reveals its 1Q20 GDP statistics.

6 to 13 April: Fresh datapoints to help gauge the impact of global lockdown

The concluded OPEC+ oil supply agreement is similar in substance to that outlined on Thursday. According to the official statement, OPEC+ members will reduce production by 9.7 million barrels per day. However, the supply-side adjustment will probably be insufficient to bring balance to the oil market in the near term, since the estimated decline in global demand falls in the range of 20-30 million barrels a day. Furthermore, there are signs of disunity, which imply – in our view – that compliance might prove to be poor over time and thus reaching the point where the supply and demand balance could be further delayed.

Macro data from China this week may provide insights on the breadth and scope of the coronavirus’ economic impact, as 1Q20 datapoints (including GDP) will be released. Some high-frequency indicators in the US from March (e.g. retail sales, industrial production, etc.) could indicate the initial impact of the virus and the lockdown on the world’s largest economy. In addition, earnings season kicks off this week with US banks and financial firms reporting their results. These datapoints could provide markets reference points for economic and financial performance in a time of the global coronavirus pandemic.

30 March to 5 April: Data reveals the degree of global economic weakness in March

During the week, the JP Morgan Global Composite PMI was released, showing a fall to 39.4 in March, the second steepest monthly decline in its history and a 133-month low. The fall in the Global PMI in March is comparable with the magnitude during the Great Financial Crisis. Unsurprisingly, the monthly jobs report in the US broke the run of 113 consecutive monthly job gains. In March, non-farm payrolls declined by 701,000, whilst the unemployment rate rose to 4.4%. Meanwhile, weekly jobless claims spiked to 6.7 million, totalling 10 million in just two weeks.

Although it is already April, we are going to see hard economic data from February (e.g. Germany, the UK, India, etc.). Therefore, the actual impact of the coronavirus and lockdowns will only be partially reflected in them, if at all. During the week, the Fed is going to release the minutes of the last FOMC meeting (when the 100bp rate cut was delivered and the large-scale asset purchases were announced), which may shed further light on the Committee’s thinking-process.

23 to 29 March: A decade-long economic cycle comes to an abrupt end

It is no doubt that the global economy is going through a period of recession, due to the coronavirus’ overwhelming impact. In the US, Markit composite PMI declined to 40.5, whilst the University of Michigan consumer confidence index significantly decreased in March. Meanwhile, initial jobless claims spiked to 3.3mn until the 21^st March – indicating that the era of a tight and hot American jobs market has abruptly ended. Meanwhile, the Chinese statistics office reported just two weeks ago that industrial production, retail sales and fixed asset investments sharply contracted in January and February.

Looking ahead there are plenty of datapoints in the economic diary for this week, which will shed further light on the extent of the initial damage the coronavirus outbreak has wrought on the global economy. NFP payroll and the official unemployment rate data in the US will reflect on the state of the labour market, whilst the ISM manufacturing index in the US and manufacturing PMIs across China, India, the ASEAN region, Latin America and Africa will provide partial insights how businesses perceive economic developments on the ground. In our opinion, since visibility remains foggy and limited, investors need to find comfort in the fact that many governments and central banks have been taking unprecedented measures to minimise the virus’ negative impact on the economy.

16 to 22 March: The Fed deploys targeted tools, whilst Capitol Hill stalls

We wrote about the Federal Reserve’s (Fed) comprehensive set of measures last week, which were taken to reduce debt service costs, ensure credit flow to the economy and to reduce liquidity-related stress in financial markets. The Fed took further steps during the week by expanding the number of open USD swap lines with central banks (including some emerging central banks, such as the Brazilian, Mexican and South Korean), setting up a special purpose vehicle backed by the Treasury’s guarantee to purchase commercial papers, establishing a liquidity facility to enhance the functioning of state and municipal money markets amongst a raft of other measures. In our opinion, the Fed is attempting to target as many segments of its domestic money market as possible, whilst doing its best to distribute USD liquidity through most economically significant geographical regions. These targeted tools serve as proof that the Fed is doing everything it can to prevent the sudden stop in economic activity turning into a financial crisis.

Meanwhile, the fiscal rescue package in the US got stuck in the Senate on Sunday, as the motion to advance the legislation failed on a 47-47 vote, short of the 60 votes needed. The total value of the blocked agreement would have totalled a meaningful USD 1.3tn (about 6% of GDP). Democrats claimed that the Republican-designed package favoured corporations, whilst not going far enough to aid individuals facing unemployment and loss of income. We are of the view that lawmakers in the US need to find the common ground as soon as possible to increase visibility and reduce economic uncertainties as much as possible to limit the magnitude of the (expected) recession and to speed up the recovery phase.

9 to 15 March: The Fed has gone all in on Sunday

Despite the positive start of the year, the economic disruption caused by the Covid-19 has most likely led to a significant weakness across multiple industries globally. Although the range of available hard data remains limited to gauge actual activity, it is a foregone conclusion that we will probably see evidence of a weakening global economy in the first half of 2020.

To cushion the (expected) economic slowdown and to try ensure global financial stability, the Federal Reserve on Sunday reduced the Fed funds rate to its zero lower bound, committed to an open-ended asset purchase programme (at least USD 500bn US Treasuries and USD 200bn mortgage-backed securities) and opened USD swap lines with five major central banks. However, we believe that monetary policy itself is no panacea for the underlying issue brought about by the Covid-19 (as we pointed out in our GMU last week). This idea was also echoed by the Fed Chair’s cautious words during his press conference on Sunday.

The trillion-dollar question is when the US administration will finally present a comprehensive fiscal plan in the amount of at least 0.5% of GDP. We are of the view that the current circumstances strongly call for fiscal policy to step up to fill the void caused by the loss in demand. In our opinion, bolstering aggregate demand would stabilise both the economy as well as financial asset prices.

2 to 8 March: Emergency, paging Dr Beat!

In her 1984 classic, Gloria Estefan is paging Dr Beat, as she desperately needs ‘to ease the pain’ and is about to ‘go insane.’ This analogy relates to the developments during the week: Jerome Powell, Chair of the Federal Reserve was alarmed to provide emergency assistance to global financial markets, who were ‘losing their brain.’ Although the good doctor administered some paracetamol for the pain in the amount of 50 basis points, he had to admit that he can only manage the symptoms, but not to tend to the underlying disease (nCovid-19). In our opinion, it is very unusual that the Fed delivered a step of such magnitude at an unscheduled meeting.

Dr Beat, being a generalist, did his best to slow the sell-off in the US stock markets, but his efforts were only good enough to limit the downside and floor stock prices. Consequently, we are still waiting for the specialist, i.e. the fiscal arm to step up its game and administer the much-needed adrenaline, which could stabilise financial markets vis-à-vis the economy. Given this is an election year in the US, it is difficult to believe that the Trump administration will not step in by providing fiscal stimulus to the economy soon.

According to the February US jobs report released on Friday, the labour market remained tight and hot in January and February, as the NFP was very strong at 273,000, whilst nominal wage growth rose to 3% YoY. Such a tight labour market, in our view, indicates that the US consumer is very likely to hold up well in the short-term. In addition, collapsing oil prices will further boost households’ purchasing power, which – to some extent – will offset (the expected) industrial weakness.