Morning Commentary: Not Your Father’s Recession

Foreign Exchange - Morning Commentary
Not Your Father’s Recession 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Market risk off sentiment continues to intensify.  Yesterday, Fed Chair Powell gave a webinar in which he warned of significant downside economic risks.  Additionally, markets were also hit with bearish comments from a handful of well-respected investment professionals.  Despite elevated equity prices, the reality remains that the real economy is hurting as today’s 2.98 million jobless claims print highlights.  

During normal recessions, the job losses from larger companies tend to be greater than the job losses from smaller business.  Case in point, during the last recession that lasted roughly two years, large corporations let go of 8.1% of their employees with small businesses shedding 6.9% of employees.  

This time around, things have been much different as social distancing measures disproportionately hit the cash flow for smaller business.  Conversely, larger corporations have been able to tap into capital markets for help, i.e. Boeing raised $25 billion in its recent bond offering.  

As a result, small businesses lost 17.8% of their workers in April versus “only” 13.6% for larger corporations.  The picture is worse for companies with less than 50 employees as those business have been forced to cut 18.5% of workers.  Keep in mind, without the Payroll Protection Program, the drop in small business employment would have been even worse that the numbers reported.  

This dichotomy in impact across companies helps to explain why the stock market continues to move higher despite pain in the real economy.  Simply, companies listed on stock exchanges have been hit less hard that those not listed.  Of course, the Fed’s massive fiscal stimulus doesn’t hurt.  Fiscal authorities have already spent as much as they spent during the whole Great Recession and the Fed did as much in two weeks as it did in two years last time around.   

But risks still remain.  The initial shock hit the services sector but as with all recessions, the initial shock is followed by a negative feedback loop via weak confidence and low income and spending.  While re-opening the economy should help the services sector, the negative feedback loop should hit durable spending which put activities done by companies listed on the stock market at risk. 
  • US initial jobless claims came in at 2.98 million against market expectations for a 2.5 million job loss.  This marks the 8th consecutive week of job losses in the millions with the total jobless claims during this period over 36 million.  The silver lining, if any, is that initial jobless claims have been trending down for the last four weeks but, to be clear, the absolute number remains staggeringly bad.  
  • US-China tensions continue to grab headlines with Trump wondering what would happen if the US cut ties with China.  The view remains that all the China rhetoric is just that.  The US economy remains fragile, making it a poor time to ramp up tensions with China.  However, proximity to US elections and increasing anti-China sentiment does flag the risk of continued saber-rattling.         
  • Banco de Mexico is expected to announce a 50 bps rate cut to 5.5% today as it continues to cut rates.  
  • Fed Chair Powell pushed back against negative rates despite Trump expressing his support for yields below zero.  
  • New reports indicate that the European Commission is preparing to announce an economic package for the most impacted countries.  While welcome, details still remain light.  
  • Australia’s jobs report came in worse than expected with the country losing 594k jobs against expectations for a 575k loss. 
  • Japan is expected to lift the state of emergency in most areas, including Tokyo and Osaka.  
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