Morning Commentary: Not Your Father’s Recession

Foreign Exchange - Morning Commentary
Not Your Father’s Recession 
Share this story:
Facebook
Twitter
LinkedIn
Email
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. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • 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.  
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog

Fidelity: Bollinger band stock signal

Viewpoints: What to do after a data breach