Updated: May 2, 2020
If you had told me at the start of the year that the US economy would shrink at a Q/Q rate of 4.8% and that unemployment claims would spike by 30mln, all by the start of May, I would have asked what substances you had been taking.
But this seemingly impossible reality is upon us. And by this point, it is coming as no surprise to anyone that US data has gotten so ugly.
Just like they have all over the world, Covid-19 pandemic lockdowns have crushed the US economy. This week, more than any so far during this crisis, drove that point home.
Wednesday - US Q1 GDP contracted at a Q/Q rate of 4.8%, a record drop from Q4 2019’s healthy growth rate of 2.1%.
Thursday - US Weekly Initial Jobless Claims fell last week by -603k to 3.839mln, higher than expectations for an increase in claims of around 3.5mln. Over 30mln Americans have now been forced to apply for insurance benefits for the first time amid the Covid-19 crisis.
Friday - US April ISM Manufacturing PMI came in at 41.5, a little better than expectations for 36.9, but still substantially lower than the prior reading of 49.1. Once again, the headline seems to have been propped up by longer delivery times (which is taken as a good sign for demand in “normal” times, which we are NOT currently in). The subcomponents made for grim reading; prices came in at 35.3 (exp. 35, prev. 37.4), employment 27.5 (exp. 37, prev. 43.8) and new orders 27.1 (prev. 42.2).
What this means for markets?
The current state of the US economy does not come as a surprise - everyone knew that lockdowns would be devastating for workers & businesses, especially sectors where there is a high reliance upon interpersonal services (tourism, entertainment, restaurants, bars etc.).
The violent sell-off seen in risk assets that lasted from late-February until Mid-March was when markets were forced to adjust to this new reality. In other words, we saw this sell-off because in the space of a few weeks, markets went from “everything is fine and dandy and rosey” to “OMG we face the largest recession possibly ever”.
What is driving the market right now is expectations about how the economy will shape up over the next six months to one year. In other words, are we going to see a V, L, U or other shaped recovery from this crisis. Given aggressive stimulus from global central banks and governments, risk assets at the moment seem to be pricing in more of a V shaped scenario than anything else - that is why they have recovered so much from mid-March lows.
That is why markets are so sensitive over things like; a possible treatment for Covid-19 (like Remdesivir). If the treatment turned out to be a game-changer in terms of drastically reducing the death rate (unfortunately only looks to be slightly helpful at the moment), then economies could confidently reopen, pursue a herd immunity strategy and save those who become the sickest with the treatment. This would allow for more of a V-shaped recovery.
Markets are also sensitive to international reopening schedules. Risk assets want to see economies reopened as fast as possible to get the economy recovering as fast as possible, but, if such a move was accompanied by a big spike in Covid-19 cases, this may again trigger some concerns.
One emerging theme is a rise in US/China trade tensions. Angry at China for attempting to cover up the outbreak and then lying about their actual number of Covid-19 cases, Trump is already looking to escalate tensions with China. Markets hate this for the exact same reason they hate the thought of a no-deal Brexit for the UK at the moment - we already face enough economic disruption at the moment with the lockdowns. Do we really need more? Another US/China trade war would seriously undermine the global post-Covid-19 economic recovery.
Note: when I refer to markets liking or hating something, I am referring to risk assets like stocks, crude, AUD, NZD, CAD etc. For example, when I say “markets would love this”, I mean that risk assets would go higher if it happened.
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