Morning Commentary: Small But Significant

Foreign Exchange - Morning Commentary
Small But Significant
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Today, the House of Representatives is scheduled to vote on a bill that, among other things, provides additional funding to small businesses.  Small businesses account for a significant part of the economy.  By pure numbers, there are roughly 20 thousand large businesses compared to about 31 million small business (revenues over $1,000 with less than 500 employees). 

In terms of employment, small business account for 47.3% of employment while being responsible for 65% of net job creation from 2000 to 2018.  On an industry level, small business account for 80% of jobs in construction and more than 60% of jobs in accommodation, food services, arts, entertainment and recreation. 

Even in the best of times, small business have been a vulnerable sector with 20% of them failing within the first year.  It shouldn’t be a surprise then that small businesses have been one of the hardest hit sectors during the current crisis and a focus of the government’s rescue efforts.   

The issue is that it is hard to support this sector of the economy.  Historically, it takes 6 months to get a loan from the Small Business Administration due to the heavy credit checks.  To speed up the distribution of funds, the Paycheck Protection Program (PPP) has been run through banks, but this still has issues as many small businesses don’t utilize banks for loans. 

Moreover, the trade-off between speed and accuracy means that there is waste.  Eligibility for loans to be forgiven is based on retaining employees, but there isn’t a requirement to prove employees would have otherwise been laid off.  The PPP program is a lifesaver for some companies but a windfall for others.  A similar dynamic is at play when sending checks to taxpayers. 

To be clear, the economy clearly needed quick action and the perfect shouldn’t be the enemy of the good.  However, the need for quick action also means that the total dollar amount published doesn’t accurately reflect the amount of economic help being provided.  As a result, additional support will be needed due to inefficiencies of the support programs and the magnitude of the COVID-19 headwinds.  
  • US initial jobless claims came in a 4.43 million, slightly better than expectations for 4.5 million job losses although still a massively large number.  Since the start of the lockdown, 26.5 million jobs have been lost; this exceeds the number of jobs created since the Great Financial Crisis.  Assuming that all people who filed for unemployment benefits are counted as unemployed, April’s unemployment rate could rise to around 20% with the potential to rise even higher over the coming months. 
  • Due to the speed at which the economy is evolving, high frequency data and survey data have taken on increased importance.  To that end, PMI data out of Europe, Australia, Japan and the US paint a bleak picture.  Euro area composite PMI plunged to 13.5 with the UK’s composite number dropping to 12.9.  Both of these prints represent record lows.  News out of the US is similarly bad with composite PMI printing 27.4.  Australian composite PMI printed 22.4 and Japan’s composite PMI came in at 27.8.  A reading of 50 represents the cut off between expansion and contraction. 
  • Yesterday, the ECB announced that it will accept junk rated debt as collateral.  To be eligible, the assets have to be rated at least BBB- on April 7.  Today, European leaders will attempt to agree on a 2 trillion euro aid plan. 
  • The BoJ announced that it will consider removing bond buying limits. 
  • Oil is receiving some support from Kuwait and Algeria, two OPEC+ members that have reduced production prior to the May 1 start date for the new production cut deal.
  • Frictions between the US and Iran has ramped up again with Iran vowing to target any US ships that endanger Iranian vessels in the Persian Gulf.  This threat came after President Trump said he ordered US Navy ships to destroy any Iranian ship threatening US ships.  
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