The Market Today
Fed Expectations Moving Lower and Lower; Historic Job Loss for U.S. Economy
by Craig Dismuke, Dudley Carter
Worst Month for Job Loss in U.S. History: The economy lost 20.5 million nonfarm payrolls in April, by far the worst level of monthly job loss in U.S. history. There were 152.4 million nonfarm payrolls at the February peak. More than 14% of those jobs have now vanished over two months. Based on the more timely initial jobless claims data, there could be further job loss in subsequent months. In the household report, the unemployment rate jumped to 14.7% as 22.4 million fewer people reported as employed and 6.6 million people left the labor force. However, the shocking increase in the unemployment rate appears to have been materially under-reported. Capturing the true nature of how bad the employment picture was in April was the underemployment rate which rose from 8.7% to 22.8%
Establishment Survey Shows Every Sector Lost Jobs: Across the board, the details of the reports were disastrous. In the establishment survey, the leisure sector led the declines with 7.7 million lost payrolls. Education and healthcare lost 2.5 million, the retail sector lost 2.1 million, business services lost 2.1 million, manufacturing lost 1.3 million, and government lost 980k jobs. Every sector lost jobs.
Household Report Likely Understated Unemployment Picture: As for the under-reporting of the unemployment rate in the household report, the proper classification for furloughed workers is ‘unemployed on temporary layoff’. That number increased to 18.1 million in April but likely should have been higher. The number of people who reported as ‘employed but absent from work for other reasons’, which would be an incorrect reporting for a furloughed worker, was dramatically higher than a normal April. According to the BLS, if those persons ‘had been classified as unemployed on temporary layoff’, the overall unemployment rate would have been almost 5 percentage points higher.” Also in the household report, the number of people still counted as employed but working part-time for economic reasons increased another 5.1 million bringing the two-month increased to 6.5 million.
As Bad As It Was, It Was Expected: The April employment reports were atrocious and reflect the magnitude of the economic damage done by Covid-19. By every metric, the labor market was in a worse position in April than it was at the height of the Great Recession. However, this was expected coming into the report. The silver lining is that most of the persons reporting lost jobs are also reporting an expectation for it to be temporary. Moreover, today’s situation is fundamentally different than previous economic cycles in which misallocations of resources have led to long-lasting corrections.
Expectations for a Slower and Slower Recovery Driving Market Expectations to Negative Rate: The focus will soon turn to how quickly jobs return as states attempt to re-open their economies. The amount of job loss, illustrated in the jobs report, has been unimaginable. While there may yet be more job loss in coming months, the bigger question will become the longer-term impact: will the economy regain all of the lost jobs and how long will it take. Given that the outbreak was more widespread than expected, quicker than expected, and is lasting longer than expected; it is increasingly likely that it takes many years to recover most of the lost jobs this spring. This realization is likely part of the sentiment driving Fed Funds Futures into negative territory for the first time yesterday.
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Monitoring the Headlines
Economic Reopening: Away from the excitement in interest rate markets (more below), several other headlines showed the focus remains on the prospects of a successful economy reopening of the global economy. Mexico will present its plan for reopening next week. U.K. Prime Minister Johnson will discuss his plans in a televised address to the country on Sunday evening, but said it will represent “maximum caution” and could be ended if cases resurge. France announced it was ready for massive testing and will begin reopening businesses on Monday. Denmark’s government and parliament agreed to a second phase of reopening to begin with all retail businesses on Monday. In the U.S., Ohio announced some businesses would reopen on May 15. President Trump said he expects Texas to be booming soon.
On the Medical Front: Much of the success of a sustained restart of the economy is seen as heavily contingent on progress towards ample testing and an effective treatment. Before markets opened, shares of Moderna rocketed after the FDA approved the company to move its vaccine candidate into phase two trials. The company said the third phase could begin as soon as early summer. In other drug related news, Japan gave Gilead’s remdesivir emergency approval for treating the virus.
From Washington: Tensions between the U.S. and China continued to heat up. Top trade officials from the two countries set up a call for next week. President Trump again hinted a report on the virus’s escape from China would come soon. Senate Majority Leader McConnell said his chamber is likely to take up a human rights bill related to China and believes China attempted a cover up related to the outbreak. House Minority Leader McCarthy announced the creation of an all-things China task force. Away from China, Speaker Pelosi said the next aid bill is “imminent” and NBC reported that the tax filing deadline could be pushed again to December 15.
Stocks Faded an Early Rally but Closed with Respectable Gains: The stock market has seemingly looked past anticipated bad economic news as investors watch many countries in Europe and states across the U.S. start to lift restrictions put in place to slow the spread of the virus. The Treasury market, on the other hand, has been more cautious and held lower by unlimited pledges from the Fed to do what it takes to support the economy. Those dynamics remained in place in what turned out to be an interesting day on Wall Street. The S&P 500 closed up 1.2% after gaining as much as 1.9% despite millions more in jobless claims and a deep contraction in consumer credit card spending. But the bigger focus was on movements in the fixed income and interest rate futures markets.
Treasury Yields Fell Sharply as Futures Priced in Negative Fed Policy Rate: Treasury yields rose after the claims data, but began a rapid descent around 9:30 a.m. CT. While the claims data likely reinforced the tone, the impetus seemed to be an unexpected move in the fed funds futures market surrounded by a host of cautious Fed comments. While the Fed has all but sworn them off, the futures market placed a bet that negative rates remain in play. The fed funds futures contract for January 2021 rose to above 100 in price, implying a negative Fed policy rate early in 2021. By the close, the futures curve implied a negative policy rate for all of 2021. The sentiment pulled the 2-year Treasury yield down 4.0 bps to 0.139% and the 5-year yield 6.6 bps lower to 0.305%, both new all-time lows. The 10-year yield fell 6.2 bps to 0.64%.
U.S., China Have Positive Phone Call on Trade: With weeks of shocking jobless claims figures and Wednesday’s ADP report absorbing the shock of this morning’s official confirmation of unprecedented job loss, global equities rose Friday as investors hope activity will pick back up and on reports of a positive call between trade officials from the U.S. and China. The U.S. said in a statement, “Both sides agreed that good progress is being made” and that “in spite of the current global health emergency, . . . fully expect to meet their obligations under the agreement in a timely manner.” Stocks rose 1.6% across Asia and were up 0.7% in Europe. Tensions between the two countries have returned recently as the U.S. has repeatedly called out China for late notification about the virus that allowed it to spread rapidly around the globe.
Dreadful Data Pile Continues to Grow: The pandemic has cratered the global economy, further evidenced Friday by Japan’s record-worst April composite PMI being revised even lower, a record plunge in industrial production in Spain in March, and the largest decline in German exports on record in March. Ahead of this morning’s jobs report, the 2-year yield was 1.8 bps lower at 0.12% and the 5-year yield was down 1.6 bps at 0.29%, both record lows. The 10-year yield had edged back 1.8 bp to 0.62%. Following the report, stocks initially added modestly to overnight gains while Treasury yields moved higher. At 7:50 a.m. CT, the 2-year yield was down 0.6 bps but the 10-year yield had reversed to up 2.3 bps on the day.
Thursday’s Fedspeak: Atlanta Fed President Bostic said the Fed is “not in any hurry” to remove support and “it is really a whatever it takes scenario.” Minneapolis Fed President Kashkari expected today’s unemployment rate to “be something like 16%, or 17%” although he estimates the actual level may be as high as 24%. And while he believes “we’re going to avert the kind of Depression scenario, because policy makers are going to continue to be aggressive to fight that outcome,” he said “it’s becoming clear that we’re in for a long, gradual recovery.” San Francisco Fed President Daly agreed, saying no one that she is talking with is expecting a quick V-shaped rebound. Philadelphia’s Harker noted, “Until the virus itself is under control, . . . we can expect the economy to underperform relative to where it was just a couple of months ago.” Harker also disclosed the Fed was considering facilities for lending to colleges and universities and nonprofit medical institutions.
Consumer Credit Posts Sharp Contraction: Non-real estate consumer credit contracted severely in March as consumers were forced out of retail stores by stay-at-home orders and cut back on spending in anticipation of potential job losses. According to the Fed’s latest G.19 report, total consumer credit outstanding fell $12 billion, or at a 3.4% annualized rate, the biggest dollar drop since 2010. While non-revolving credit picked up, revolving credit, primarily credit cards, fell $28.2 billion or at a 30.9% annualized rate, the sharpest percentage decline since 1989.