- Weekly global market focus
- Congress today will resume negotiations on new rescue bill
- U.S. pandemic has yet to peak and economic damage is piling up
- OPEC+ reaches 2-year production cut agreement
Weekly global market focus — The U.S. markets this week will focus on (1) forecasts for when the U.S. economy might start to reopen, (2) Congressional negotiations on a new virus rescue bill and any new stimulus measures from the Fed, and (3) U.S. economic data with Wednesday’s March retail sales expected to plunge -8.0% m/m.
In Europe, the markets were pleased that EU finance ministers last Thursday agreed on a 540 billion euro rescue package, although that deal still needs to be approved by EU leaders. The deal was a win for Italy since it can get mostly unrestricted access to the European Stability Mechanism bailout fund for health-related expenses, although Italy didn’t get any commitment for jointly-issued coronabonds.
In Asia, the release of China’s Q1 GDP report this Thursday evening (ET time) is expected to show a plunge of -5.9% y/y. The U.S. markets are closely watching the Chinese data as somewhat of a proxy for the upcoming U.S. economic data, although the pandemic is likely to last longer in the U.S. and could therefore cause more economic damage.
Congress today will resume negotiations on new rescue bill — Senate Democrats last Thursday blocked Senate Majority Leader McConnell’s attempt to get the Senate to approve by unanimous consent his proposal for a $250 billion boost in the Paycheck Protection Program (PPP) from its current size of $350 billion. The PPP program has been deluged with applications and is expected to run out of money within a matter of days.
House Speaker Pelosi and Senate Minority Leader Schumer are pushing for a larger program of $500 billion that has the $250 billion of PPP funding, plus $100 billion for hospitals, $150 billion for state and local governments, and a 15% increase in the SNAP food stamp program. Ms. Pelosi said negotiations on a bill would resume today. If a deal can’t get approved by the House and Senate by unanimous consent, then Congressional members will have to be recalled to Washington from their recess for floor votes.
U.S. pandemic has yet to peak and economic damage is piling up — The markets this week will continue to monitor the pandemic and when the U.S. economy might be able to start reopening. The U.S. over the weekend took the lead as the country with the most deaths from the coronavirus with 19,800 deaths, according to John Hopkins, overtaking Italy’s 19,500 deaths. The U.S. had 2,108 deaths just last Friday from the coronavirus, a record daily high for any country. Meanwhile, the number of new cases of the virus in the U.S. continues to rise and there is no way of knowing when new cases might peak. Most of the U.S. is under stay-at-home orders, but there are many loopholes and some states are refusing to close down at all.
President Trump is hoping to get some of the U.S. economy restarted by May 1, although White House medical aides are not generally optimistic about the timeline. U.S. Surgeon General Jerome Adams last Friday said that some areas of the U.S. that have been lightly affected might be able to open by May, but “Most of the country will not, to be honest with you.” The economic damage in May could therefore be as bad as, or even worse than, in April.
The consensus is that U.S. GDP will fall by -3.1% (q/q annualized) in Q1 and by -25% in Q2, before rebounding in Q3 and Q4, according to a survey of economists conducted April 3-9 by Bloomberg News. The consensus implies a peak-to-trough GDP drop of -7.1% (i.e., -0.8 q/q in Q1 plus -6.3 q/q in Q2). A peak-to-trough decline of -7.1% from the pandemic would be much worse than the -4.0% decline seen in the Great Recession, though much less than the -26% drop seen during the Great Depression.
On the labor front, the consensus in the Bloomberg survey is for the unemployment rate to rise to 12.6%. That would be a new post-war record high, taking out the current high of 10.8% posted in 1982. A 12.6% unemployment rate in this cycle would be about half of the all-time U.S. record high of 24.9% posted in 1933 during the Great Depression.
OPEC+ reaches 2-year production cut agreement — OPEC+ members on Sunday finally agreed on a production cut totaling 9.7 mln bpd. The production cut was only 9.7 mln bpd rather than 10 mln bpd because Mexico rejected the call for a 400,000 bpd cut and would only agree to a 100,000 bpd cut. The 9.7 mln bpd cut applies for May-June and the cut will then be tapered to about 8 mln bpd for the remainder of 2020 and to about 6 mln bpd for the following 16 months (until Apr-2022).
The deal was not dependent on whether G-20 countries contribute production cuts. The U.S., Brazil, and Canada said they would contribute 3.7 mln bpd of cuts, although those seemed to be the “automatic” cuts that are being forced by the market rather than voluntary cuts forced by the government.
The production cut deal was temporarily supportive for oil prices but may not prevent new losses. The OPEC+ production cut of 9.7 million bpd, even if fully implemented, doesn’t come close to plugging the 25-35 million bpd drop in demand caused by the pandemic. The deal at most delays the day when global oil storage facilities will be completely full, at which point oil prices could fall into the teens or lower.
However, OPEC+ seems to be hoping that the global economy will rebound quickly and that energy demand will return in time to prevent a new price meltdown and the need for even larger cuts. The main bullish factor in the agreement is that it lasts for two years, which reduces the threat that Saudi Arabia will launch a new price war, and keeps production restricted while OPEC+ waits for demand to recover.
