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  • Markets are braced for worst quarterly GDP drop in U.S. post-war history 
  • U.S. unemployment claims expected to show another week of backsliding
  • Markets get the dovish FOMC meeting they expected 
  • Meadows says he expects unemployment bonus to expire Friday

Markets are braced for worst quarterly GDP drop in U.S. post-war history
 — The markets are braced today for the worst GDP report in U.S. post-war history.  However, the good news is that GDP growth in Q3 is already on the upswing, which might allow the markets to largely overlook today’s GDP report if it is worse than expected.  The key question is the sustainability of the current economic recovery, given that the second Covid wave is producing new restrictions and is curbing spending on restaurants, bars, travel, and entertainment.

The consensus is for today’s Q2 GDP report to plunge by -34.5% (q/q annualized), adding to Q1’s drop of -5.0%.  On a quarter-on-quarter basis, today’s Q2 GDP report is expected to drop by -10.0% q/q, far worse than the previous post-war record drop of 2.6% q/q seen in Q1-1958 that was caused by the 1957-58 global flu epidemic.

Today’s expected Q2 decline of -10% q/q would add to Q1’s drop of -1.3% q/q and produce an overall peak-to-trough drop of -11.3%.  That would be the worst recession by far in post-war history and far worse than the -4.0% peak-to-trough decline seen during the Great Recession in 2007/09, although not nearly as bad as the -26% decline seen during the Great Depression.

To some extent, the markets are willing to sweep the first half of 2020 under the rug as long as they believe GDP will recover strongly in the second half of the year.  The consensus is for GDP growth to recover by +18.0% q/q annualized (+4.2% q/q) in Q3 and by +6.5% q/q annualized (+1.6% q/q) in Q4.  However, the expected overall +5.8% rise in the second half of 2020 would recover only about half of the plunge in the first half.  On a calendar year basis, the consensus is for GDP to drop by -5.9% in 2020 and then recover by +4.0% in 2021 and +3.0% in 2022.

U.S. unemployment claims expected to show another week of backsliding — The markets were a bit alarmed by last week’s initial unemployment claims report, which rose by +109,000 to 1.416 million for the first increase since March.  That report indicated that the U.S. labor market is back-sliding and that more people were forced to file a claim for unemployment benefits because of (1) new restrictions from the second Covid wave, (2) the expiration of PPP money, and (3) layoffs tied to a poor medium-term outlook for the economy.

Today’s initial claims report for the week ended July 24 is expected to show a further increase of +14,000 to 1.43 million, although that would at least be better than last week’s +109,000 rise.  Initial unemployment claims are down sharply from the peak of 6.9 million seen in March, but are still about 1.2 million higher than usual.

Today’s weekly continuing claims report for the week ended July 17 (which lags the initial claims report by a week) is expected to show a rise of +53,000 to 16.250 million, showing that the continuing claims series is also going in the wrong direction.  The claims data shows that there are about 14.5 million more people than usual on the unemployment rolls.

Markets get the dovish FOMC meeting they expected — The stock market closed higher on Wednesday after the markets got the dovish FOMC meeting they had been hoping for.  The interest rate markets showed little net reaction to the FOMC meeting or to Fed Chair Powell’s comments.  The federal funds futures curve was unchanged for the 2020-2021 contracts and fell slightly by -0.5 bp for the 2022 contracts.  The 10-year T-note yield on Wednesday closed slightly lower by -0.5 bp at 0.574%.

Fed Chair Powell on Wednesday said he sees signs that the recent rise in Covid cases is weighing on the economy and that continued monetary and fiscal support is needed for a recovery.  The FOMC’s post-meeting statement said the pandemic “poses considerable risks to the economic outlook over the medium term” and the fed funds rate would remain near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The Fed did not change its guidance and there was little change in the language of the post-meeting FOMC statement.  However, Fed Chair Powell raised expectations for the FOMC at its next meeting to issue new interest rate guidance when he said that FOMC members this week focused on “possible enhancements to our statement on longer-run goals and monetary-policy strategy.”  He said he expects the FOMC to “wrap up our deliberations in the near future.”  The markets are expecting more specific guidance where the FOMC promises to keep rates low until the unemployment rate falls below a specific level and inflation nears or matches its 2% target.

Meadows says he expects unemployment bonus to expire Friday — The stock market on Wednesday was undercut again by the lack of any progress in negotiations over a new pandemic bill.  After another Meadows-Mnuchin-Pelosi-Schumer meeting on Wednesday, White House Chief of Staff Meadows said, “We’re nowhere close to a deal.”  He said he expects the unemployment bonus payment to expire on Friday.

Republicans are talking about a short-term extension of the unemployment bonus and eviction protections.  Mr. Meadows said, “There’s been a lot of discussion about that, but Speaker Pelosi and Leader Schumer have made it very clear that they’re not going to do that.” The August recess is approaching quickly with the House planning to go on recess this Friday and the Senate next Friday.  Speaker Pelosi said the House will stay in session if necessary to complete a pandemic bill.

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