The last week’s market highlights:
Quote of the week:
“May, more than any month of the year, wants us to feel more alive.” ̶ Fennel Hudson
Three central banks come to the fore
With the global economy reeling in the face of the coronavirus, central banks worldwide have been administering badly needed monetary stimulus to prevent even further damage. Last week, investors zeroed in on policy meetings held by the “Big Three”: the Bank of Japan (BoJ), U.S. Federal Reserve and European Central Bank (ECB).
Although the BoJ sprang into action in March to help prop up the country’s already weak economy, more firepower was needed. The BoJ delivered that at its meeting last Monday, April 27. Just four days before, data showed that Japanese economic activity had fallen to its slowest pace on record in April.5 Against that dire backdrop, the BoJ announced plans to:
- Increase its annual purchases of equity exchange-traded funds and real estate investment trusts to a maximum of ¥12 trillion ($112 billion) and ¥180 billion ($1.7 billion), respectively. The BoJ began these programs in 2010 in response to the 2008-09 global financial crisis.
- Boost its corporate bond and commercial paper holdings by a combined ¥15 trillion, to ¥20 trillion, by September 2020. These direct purchases should help keep corporate borrowing costs down.
- Buy government bonds in unlimited quantities. Analysts believe this pledge will have little impact on yields, as the BoJ is already purchasing far less than its previous cap of ¥80 trillion.
While it didn’t lower interest rates, the BoJ pledged to “closely monitor the impact of COVID-19 and will not hesitate to take additional easing measures if necessary.”
Next up was the Fed, normally the main draw whenever central bank calendars converge. But at their meeting last Wednesday, Chair Jerome Powell and his colleagues made no headlines. As expected, the Fed maintained its fed funds policy range at 0% to 0.25% and reinforced plans to continue its “bazooka” of large-scale asset-purchase programs and lending facilities.
The Fed also added a new sentence to its policy statement, describing the health care crisis as posing risks to the economic outlook over the “medium term”—a period of one to two years, in all likelihood. This outlook hints strongly that the Fed believes it will still need to guide the economy when the country finally reopens, presumably over the next few months.
In his post-meeting press conference, Powell expressed the central bank’s view that interest rates would remain at or near zero “for a good while.” He also continued to emphasize his belief that the Fed’s current role is to help keep financial markets functioning and to minimize COVID-19’s economic damage. At the same time, Powell made clear that he believes expansive fiscal stimulus—not monetary policy—is the most effective way to fill the economic hole. And that hole is a big one: U.S. GDP contracted at a 4.8% annualized rate in the first quarter.
Then it was the ECB’s turn. Last Thursday, shortly after data showed eurozone GDP contracted by 3.8% in the first quarter—14.4% on an annualized basis—the ECB wheeled out a complex array of stimulus measures.6 These included:
- Highly favorable terms under its TLTRO, or targeted longer-term refinancing operations. Starting in June, banks will be able to borrow from the ECB at a rate of -1% for loans made to nonfinancial corporations and households. Lenders not meeting these guidelines can still borrow at -0.5%. In either case, with these negative rates, the ECB will effectively be paying banks to borrow.
- A new borrowing program, PELTROs (pandemic emergency longer-term refinancing operations), which is designed to ease strains in short-term funding markets.
Equity market reactions to last week’s central bank policy meetings were mixed. Japan’s Nikkei 225 Index rallied in the wake of the BoJ’s pledges. In the U.S., the S&P 500 Index closed sharply higher on Wednesday, although investors appeared to be focused more on positive data from a trial of a potential coronavirus treatment than on the Fed’s pronouncements.
But European stock markets were disappointed that the ECB decided not to lower interest rates or, more importantly, expand its €750 billion Pandemic Emergency Purchase Program (PEPP), the ECB’s version of quantitative easing launched specifically in response to COVID-19. Europe’s STOXX 600 Index slipped 2% on Thursday, although the central bank indicated that it was “fully prepared” to increase PEPP’s size “by as much as necessary and for as long as needed.7
A bad first quarter for the U.S. economy
According to the government’s advance estimate, the U.S. economy contracted at a 4.8% annualized rate in the first quarter, its first negative reading in six years and worst three-month period since 2008.8
As painful as the headline number was, the underlying details told an even grimmer story:
- Personal spending, which accounts for about two-thirds of GDP, fell 7.6%, the steepest quarterly drop since 1980.9 Only a surge in spending on nondurable items, which include groceries, kept this number from falling further.
- Spending on services plunged 10.2%, the largest decline since the government began compiling statistics in 1947.9 Driving the slump was a decrease in health care services. People cancelled medical appointments, and hospitals stopped performing lucrative elective procedures in order to focus on treating COVID-19 patients.
- Private investment, already a drag on economic activity due to the impact of the U.S./China trade war (remember that?) skidded 5.6%.9 With the pandemic forcing business closures and denting demand, companies’ plans to invest have been shelved.
So what “helped” the economy in the first quarter? Trade, but not for good reasons. While the trade deficit narrowed, both sides of the equation were ugly: imports (-15.3%) fell more than exports (-8.7%).9
Keep in mind that lockdowns and business closings didn’t begin in earnest until mid-March, so the first quarter’s GDP decline reflects only a small portion of the economic damage wrought by the pandemic so far. With measures to prevent the spread of the virus remaining in place across most of the country for the duration of April, a second-quarter contraction in the 30-40% range – again, annualized – wouldn’t surprise us.
Beyond the spending and GDP data, last week’s other economic releases were also discouraging:
- The Conference Board’s Consumer Confidence Index registered its worst monthly decline since December 1973, when the country was in the early stages of a recession fueled by OPEC’s oil embargo.
- Manufacturing activity contracted sharply to its lowest level in 11 years.10
- First-time jobless claims surged by 3.8 million, bringing the six-week total to more than 30 million.11 And at least one study suggests the cumulative job losses were far steeper. The Economic Policy Institute, a nonpartisan think tank, estimates that several million more people may have lost their jobs over the six-week period but were unable to file claims due to “overburdened” state computer systems.
Speaking of jobs, this Friday, May 8, brings April’s payroll report. The last report, covering March, revealed that employers shed 701,000 positions, and the unemployment rate rose to 4.4%. The next set of numbers will be far worse, in our view.