Morning Commentary: Time is Money and Lives

Foreign Exchange - Morning Commentary
Time is Money and Lives
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Today, the US reported its first monthly jobs report decline since 2010, reflecting the negative economic impact of the COVID-19 outbreak.  While today’s 701,000 decline in jobs came in significantly worse than both the market consensus (-100,000) and whisper number (-225,000) the risk remains for things to worsen.  Keep in mind that the March payroll number is largely a pre-crisis number as it covers mid-February to early March.  Next month’s print can easily show a payroll decline in the millions.  Moreover, the US still remains on the steep part of the infection curve with rolling lockdowns steadily increasing.   

We have written this before but it is an important point worth repeating.  Korea has shown the world how an effective healthcare system and extensive testing can slow the spread of the virus.  Keys to the Korean system include testing on demand, aggressive quarantining of hot spots and public compliance of intrusive health warnings.  China has illustrated how a country with an ineffective healthcare system can contain the virus through aggressive distancing measures and a nationwide lockdown. 

Conversely, some countries in Europe and the US are a few of the places that are trying the “rotating restriction” approach.  The issue with this approach is that it hasn’t been shown to work as Italy and China both illustrate.  Initially, Italy and China downplayed the virus then moved to local restrictions and only started to control the spread after strict nationwide policies were put in place.  Clearly, the risk remains for the US to follow a similar path.

If a full shutdown is needed to contain the virus, then partial shutdowns are wasted time that exacerbate the total economic costs.  Consider this, if the spread of the virus doubles each week, then a three week delay in containment measures results in an eight fold increase in cases and clearly extends how long the economy has to be shut down.  Should a shutdown reduce weekly GDP by 30%, an additional 4 weeks of shutdowns will drop QoQ GDP by ~33% on an annualized basis.    

Thankfully, the banking sector remains healthy and monetary and fiscal authorities in the US have stepped in with strong responses versus the 1930s when conventional thinking was for tightening during crises.  These factors will help in the recovery but even that needs to be taken in context as big growth numbers off a low base does not signal a complete reversal. 

There will be a mechanical rebound when people simply return to work and, mathematically, a 50% rebound after a 50% drop still leaves you 25% down overall.  Ultimately, the rebound in activity will depend on confidence, consumer demand and the effectiveness of macro stimulus.  In my view, a medical breakthrough is unlikely in the near term.  Therefore, the longer the delay in implementing aggressive measures is, the longer the shutdown will have to be and the longer it will take before confidence fully returns.        
  • In addition to a 701K job loss, today’s labor report also showed the unemployment rate increasing to 4.4% from 3.8% as well as a fall in the labor force participation rate to 62.7% from 63.3%.  Average hourly earnings did increase 0.4% MoM against expectations for a 0.2% increase. 
  • The number of global coronavirus cases has topped 1 million with the virus showing little signs of slowing.  Restrictions on movement continue to be rolled out with Singapore closing the workplace and France expected to extend current measures. 
  • PMI Services for Europe missed expectations, coming in at 26.4 vs. expectations for a 28.2 print.  On a country level, Germany, France, Italy, the UK and Spain all missed on each country’s respective services PMI number with Italy’s number plunging down to 17.4 from its prior print of 52.1.  While these numbers are bad, the expectation is for the economic pain to continue. 
  • China’s services PMI number beat estimates by printing 43.0 vs. expectations for a 39.0 print.  China’s number reflects the reopening of China’s economy as economic activity follows the path of the virus.  China was hit first by the virus and is further along on the recovery path.  Broadly speaking, Europe was hit next, followed by the US.  As such, expect negative economic performance to roll through Europe first before moving to the US. 
  • Oil has been on a bit of a wild ride.  Yesterday, crude prices jumped ~40% in minutes after President Trump tweeted about a production cut.  These gains faded during the Asian session only to reverse course and move higher on confirmation of an OPEC+ video conference next Monday.  Per an OPEC delegate, a production cuts of 10 million barrels a day is a realistic goal. 
  • Australian retail sales beat estimates, rising 0.5% against expectations for a 0.4% increase.  While this was a positive beat, the increase came off a small base and likely reflects precautionary stocking up ahead of COVID-19 shutdowns.   
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