- Worst unemployment report in U.S. history will be taken in stride
- US/China trade tensions returnÂ
- Markets are now discounting a negative funds rate by December
Worst unemployment report in U.S. history will be taken in stride — The markets already know that today’s April unemployment report will be the worst in American history, even including the Great Depression, which was a slow-motion affair compared with the sudden halt in the economy seen now due to the pandemic.
The good news is that the markets are expecting a fairly rapid bounceback in the labor market over the next few months as the economy reopens. In fact, 77% of laid-off employees expect to get their job back, according to a Washington Post-Ipsos survey. Those survey respondents may be overly optimistic, but they probably know better than the markets about their chances of being rehired.
Nevertheless, it will be a matter of years before the U.S. can return to full employment because (1) the current economic devastation is so deep, (2) many small and large businesses will be forced to liquidate in bankruptcy, and (3) entire sectors of the U.S. economy such as retail, travel, restaurants, and entertainment will remain hobbled until there is a vaccine.
The markets already know that 34.8 million people filed for unemployment benefits in the past eight weeks, which accounts for 22% of the employed persons in February (according to the household survey). Not all of those persons will be counted by the Labor Department as unemployed in today’s report because the job loss may have been reported after the April survey week and because some of those people won’t meet the technical definition of an unemployed person.
The market consensus is for today’s April unemployment rate to rise to 16.0%, which would easily exceed the post-war record of 10.8% posted in 1982 but would at least remain below the Depression’s record of 24.9%. The unemployment rate in May could easily be headed above 20% since the layoffs continued into late April and early May.
The consensus is for today’s April payroll report to show a -21.7 million plunge to 130.1 million jobs. That plunge would be 2-1/2 times the entire job loss of 8.7 million jobs seen during the Great Recession. Today’s expected decline to 130.1 million jobs would leave the U.S. job level just mildly above the trough of 129.7 million jobs seen during the Great Recession. In next month’s unemployment report, all of the job gains seen since the Great Recession will have been lost, at least temporarily.
US/China trade tensions return — The U.S. financial markets just went through their worst shock since the 2007/09 financial crisis and yet US/China trade tensions are back as a new threat to market stability. President Trump has mentioned the possibility of imposing new tariffs on China as punishment for his claim that China is responsible for the virus.
There are also reports that some White House officials have discussed the possibility of defaulting on Treasury securities held by China in order to extract some virus compensation from China, even though a U.S. sovereign debt default would undoubtedly tip the global financial system into the systemic crisis that the Fed has so far been able to avoid.
President Trump told reporters at the White House on Wednesday that he would be able to say next week whether he is happy about how the phase-one trade deal is progressing. Mr. Trump on Sunday said in response to a town-hall question that if China doesn’t buy the goods they promised to in the phase-one trade deal, “we’ll terminate the deal, very simple.”
China, in fact, has clearly not yet bought enough goods to meet its promise to buy $200 billion of extra U.S. goods in 2020-21, with $67 billion of those extra purchases occurring in 2020. Bloomberg Economics calculates that China bought only $14.4 billion of U.S. goods in Q1-2020, not even reaching the year-earlier (Q1-2019) purchase level of $16 billion and falling far short of the implied target in the phase-one trade deal of $34 billion. In March, Bloomberg Economics estimates that China bought only $5.2 billion of goods, falling far short of the implied trade-deal target of $10.8 billion.
Considering that the Chinese economy was half-closed in February and March, it is not surprising that China fell far short of its purchase targets. China’s economy has now mostly reopened but remains in bad shape with the rest of the world in lockdown and not buying many of China’s export products.
U.S. Trade Representative Lighthizer and Chinese Vice Premier Liu He will hold a conference call next week to discuss progress on the phase-one trade deal, according to media reports. That will be the first time they talked since the phase-one trade deal went into effect. The markets are hoping that China can convince USTR Lighthizer and President Trump that they will meet the phase-one purchase targets through the remainder of the year despite the dismal state of the Chinese and global economies. The markets are also waiting to hear whether Mr. Trump will start pushing for phase-two trade talks to deal with the more intractable issues such as China’s industrial subsidies.
Markets are now discounting a negative funds rate by December — The federal funds futures curve is now discounting a slightly negative federal funds rate from December 2020 through December 2021. The most-negative funds rate level is -3 bp in the middle of 2021. That would be only 8 bp below the current effective federal funds rate of 5 bp, but indicates that the market is now entertaining the thought of a negative federal funds rate, even if the Fed officials still claim they won’t do that because they don’t think it has worked well in Japan and Europe.
