The tenor of my recent posts to subscribers has been mostly about the real world economic outcomes being worse than anticipated. Today’s data flow is no different. Earlier today, I talked about the abysmal PMI numbers in Europe and the political outcomes that the human suffering behind those numbers will create.
Now, let’s look at the US for a second because I think that will be the focus of my talk with Raoul Pal on today’s daily briefing at Real Vision.
Unfathomable job losses
Here’s Reuters on the numbers:
The U.S. economy shed 701,000 jobs in March, abruptly ending a historic 113 straight months of employment growth as stringent measures to control the novel coronavirus outbreak shuttered businesses and factories, confirming a recession is underway.
The Labor Department’s closely watched employment report on Friday did not fully reflect the economic carnage being inflicted by the highly contagious virus. The government surveyed businesses and households for the report in mid-March, before a large section of the population was under some form of a lockdown, throwing millions out of work.
[…]
Economists polled by Reuters had forecast nonfarm payrolls decreasing by 100,000 jobs last month. Adding a sting to the report, the economy created 57,000 fewer jobs in January and February than previously reported.
So, how do we reconcile the fact that this number was 7 times as bad as predicted with an equity market that opened today barely in the red? It’s the same phenomenon we saw yesterday, with an equally horrific jobless claims number.
Is the takeaway here that this outcome was already priced in? Or is the takeaway that markets are now anticipating an even more aggressive policy response to counter the economic fallout?
My take
My sense is that it’s neither of the two answers. It’s that the market is still digesting the steep fall in risk assets from the liquidity crisis the Fed snuffed out two weeks ago. We are still in the basing period from that shock. And so, the full measure of the economic fallout to come hasn’t been digested yet.
US equity prices have only fallen twenty percent from record highs on the back of an economic decline with job losses an order of magnitude higher than anything we have witnessed since the Great Depression. That outcome doesn’t make sense in any scenario except one in which you have an overwhelming global fiscal response to almost fully replace lost output and income over the next several months or where governments intervene directly to put a floor under equities and high yield bonds.
I see both the fiscal replacement and the equity-junk intervention scenarios as very low probability outcomes. And so, I anticipate that, as more aggressively poor economic data get released, markets will adjust to the downside. The real worry has to be the slow re-emergence of a strong US dollar. Eventually, that can only cause a liquidity crunch for a global economy indebted in dollars, but starved for output and income.