It is little surprise, given a global slowdown in supply and demand, that the recent slew of economic data has been negative. Jobless claims last week showed that for the eighth straight week, millions of Americans continued to seek unemployment benefits, a total of 36.5 million thus far.
Early evidence in the states that have begun to ease lockdown measures suggests that demand is recovering gradually. The recovery, it appears, will bypass some sectors which would result in a partial recovery to U.S. GDP this year.
- Driving activity is around 75% of usual levels, up from 50% a month ago.
- New York, which is still on lockdown, has experienced a pick-up in travel by car, as underlined by the increase in gasoline demand and warmer weather.
- Public transportation remains depressed.
- Air travel has nearly doubled in recent weeks but is only at 9% from last year’s levels.
- Movie theaters sales are close to zero, unsurprisingly.
- Dining at restaurants remain depressed at 4% of normal levels.
- Texas, Florida, and Georgia vary between 10-15% from normal levels.
Negative Rates
While some market participants believe that the worst is over, last week, futures on the Fed Funds interest rate began trading to an implied negative rate territory. As early as the April 2021 contract showed an implied negative rate of -0.015%. While the Fed has developed a habit of caving to market pressure over the past year, we believe the probability is low of realizing negative fed funds rates. Fed officials and most global central banks have been united and consistent in arguing the costs of negative rates are at best equal to any benefits an economy may receive. Nonetheless, this is a surprising development to follow given how vehemently opposed the Fed has been to negative rates.
Planning Ahead
Last week, the U.S. Treasury announced plans to issue about three trillion in long-term debt between May and July (nearly 5x more than the peak quarterly issuance during the 2008 financial crisis). In summary, the issuance will be:
- $1.5 trillion of short-term treasury bills were issued in April.
- Over the next three months, bonds with maturities of 7-years and above will be sold.
- Monthly auctions of a new 20-year bond will debut.
The debt issuance will supply the U.S. Treasury with more funds to help navigate through any COVID-19 pandemic solution. The target cash reserves balance will be $800 billion, as compared to the last 12-months of $300 billion, to cover bigger payments during the pandemic. As a result of the increased debt supply, we may see an increase in long term rates and inflation. While it is too soon to worry about inflation, higher inflation worked as a debt mitigation strategy in both World Wars I and II.
It is fear of the virus rather than the lockdowns themselves that will dictate how quickly consumer and business demand recovers. Should the spread or R-value of the Sars-CoV-2 virus ease, consumer demand for goods and services could quickly increase. However, should we see a large resurgence of the virus, which revives and reinforces people’s vivid fears, the economy could further fall from where we are today. In order to achieve a full recovery, people will need to be fully confident and that will likely come with the arrival of a vaccine.
Market Snapshot
- U.S. equity futures point to a higher opening this morning with the S&P 500 index rising 1.6%.
- USD Rates higher with the 10-year U.S. Treasury rising nearly 2bps to 0.659%.
- The US Dollar rising slightly against the Japanese Yen (107.31) and Euro (1.08).
- USD weakening against the British Pound (1.215), Canadian Dollar (1.41), and Australian Dollar (0.647).
- West Texas Intermediate crude oil jumped 8.63% to $31.97 a barrel.
- Gold strengthened 1.2% to $1,764.89 an ounce.
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