Midweek Macro – 5.6.2020

Ahead of the Friday release of April’s Jobs report, with markets expecting to see a drop of 22 million jobs, several Federal Reserve speakers have been taking the podium this week to share their wisdom on our economic outlook as a country.

Some participants in America’s interest rate setting body see the possibility for a recovery in the second half of 2020, but growth is likely to be slow and uneven. Chicago FED President Charles Evans said that it is reasonable for us to look towards economic growth in Q3/Q4, but also that it is only slightly more likely than other pessimistic scenarios. Evans also said that current efforts to re-open the economy as the pandemic continues are a “bold decision with pretty high risks.”

Stock futures are up this morning on positive business sentiment around states beginning to loosen their lockdown restrictions, however, analysts caution that another equity sell-off of up to 50% of 2019’s value could lurk around the corner – especially if looser restrictions set off a second wave of infections.

There is certainly a balance between physical and economic health, as Evans also noted that if all goes well, unemployment could drop to 5% by the end of next year, but a slower decline in the jobless rate could mark longer-lasting damage to the economy. Researchers at Evan’s branch of the FED put out a new “U-Cov” jobless rate to supplement their notable U-3 and U-6 measures of employment to hone in on the true impacts of COVID by counting those skipping job hunts because of stay-at-home restrictions. This new U-Cov unemployment metric is estimated between 25%-35% for April following a multi-year streak of unemployment levels testing all-time lows.

“This pandemic does pose really considerable risk to the outlook, and the course of the economy is really going to depend on the course of the virus and the mitigation efforts” – FED Vice Chair Richard Clarida

Meanwhile, yesterday, Vice President Pence announced that the Whitehouse could disband its Coronavirus Taskforce by the end of this month. The Trump administration seems to have shifted their focus back to the January 2020 (and all of 2018/2019) hot topic – trade.

After facing growing criticism at home for a slow and poor response to the virus, the administration is looking for ways to change the narrative ahead of the November election as pundits from Fox News are calling the election a referendum on Trump’s handling of the crisis. Trump and Secretary of State Pompeo have been on TV over the past few days insinuating that tariffs are on the table to punish China for its failure to contain the coronavirus in Wuhan in December 2019. There are currently still tariffs of up to 25% on ~$370 billion of Chinese goods annually from the trade spat of the last two years. China followed up the criticism from the U.S. with its own YouTube video. This rhetoric doesn’t imply action, but the risks are certainly higher for both countries and the rest of the world as the everyone battles the economic fallout from the virus.

Trump’s administration is also focused on trade with another global power – the U.K. The two nations launched formal negotiations to a free trade agreement yesterday as the U.K. continues to restructure its economy following its exit from the EU. Both countries have been hurt by shortages of medical equipment and drugs during this pandemic and are looking to shift some of the supply chains away from China. Top U.S. trade official Lighthizer said that “depending purely on cheap imports for strategic products can make us vulnerable in times of crisis” and that the U.S. needs a healthy manufacturing base and thriving farmers. U.S. Senator Chuck Grassley said that he thought the talks will be more difficult via videoconference – “It seems to me it’s not quite as good as sitting across the table from them.”

That’s exactly how I feel – while I am enjoying the fun backgrounds and GIFs in Microsoft teams, nothing beats good old human interaction.

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