Fed Economic Update, “Ugly” China Recovery: Economic Commentary – April 9, 2020

<p>Fed Chairman Jeremy Powell, the sponsor of “liquidity banquet” on the US money markets ensured that the Fed did not skimp on supply of credit resources. After turning a blind eye to moral hazard, he’ll share with us an updated assessment of the US economy, which will shed light on possible future policy decisions. In addition, he will answer questions about emergency measures that have already been taken which, it appears, prevented an acute spasm in the economy. Namely <a href="https://blog.tickmill.com/fund-analysis/two-factors-behind-dollars-strength-need-know/" target="_blank" rel="noopener noreferrer">lack of liquidity</a> in some short-term debt markets:</p>
<p><img class="alignnone size-large wp-image-41548" src="http://blog.tickmill.com/wp-content/uploads/2020/04/1-13-1024×346.png" alt="" width="1024" height="346" srcset="https://blog.tickmill.com/wp-content/uploads/2020/04/1-13-1024×346.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/04/1-13-300×101.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/04/1-13-768×259.png 768w, https://blog.tickmill.com/wp-content/uploads/2020/04/1-13.png 1327w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p>However, it is not yet clear whether they will be effective in combating the economic consequences or will provide a springboard for growth.</p>
<p>Applications for unemployment benefits</p>
<p>Initial claims for unemployment benefits, the most frequent and comprehensive official indicator of employment in the United States rose to 6 million in the week ending March 27. Next week, an additional 5 million people are expected to file claims. Extended government social guarantees include increased unemployment benefits of more than $600 per week, which is even higher than the minimum pay rate in terms of hourly wages. For some, this can be a good incentive to stay or be unemployed, and this moral hazard reinforces the problem of stabilization of the labor market in the medium-term.</p>
<p>Fed meeting minutes</p>
<p>In the minutes of the March meeting, published on Wednesday; the Fed officials said “extremely large uncertainty” required an aggressive (and possibly disproportionate) response. The purpose of the resumption of QE was to ensure the smooth functioning of the treasury bond market and mortgage bonds, and not control long-term rates. Interestingly, officials said that they are not worried about inflation. They believe that it will slow down and remain low, reflecting underutilization of resources and low oil prices. In the event of a successful OPEC + deal, it is likely that the Fed will revise its inflation forecast and begin to curtail measures a little earlier than expected what should ease pressure on dollar.<br />
Based on the minutes of the meeting, no more surprises are expected on the side of monetary policy and we expect to hear a confirmation of this from Powell today.</p>
<p>Economic recovery after Covid-19</p>
<p>The big question that worries markets now is the “shape” of economic recovery after countries managed to curb the outbreak? The Chinese triumph of defeat of Covid-19 was marked by the removal of traffic restrictions from the coronavirus epicenter Wuhan, but Rabobank points to the weak dynamics of high-frequency indicators, such as traffic load on weekends:</p>
<p><img class="alignnone size-large wp-image-41549" src="http://blog.tickmill.com/wp-content/uploads/2020/04/2-8-1024×676.png" alt="" width="1024" height="676" srcset="https://blog.tickmill.com/wp-content/uploads/2020/04/2-8-1024×676.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/04/2-8-300×198.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/04/2-8-768×507.png 768w, https://blog.tickmill.com/wp-content/uploads/2020/04/2-8.png 1298w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p>… which indicates a kind of “hysteresis effect” in discretionary expenses (entertainment, leisure, psychical shopping, etc.) with full recovery under big question. The March rebound in manufacturing PMI in China, just above 50 points, indicated only a slight improvement over February, rather than a return to normality. It seems likely that we will see the same ugly recovery in other countries which restricts optimism about current stock market recovery.</p>
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