Month-In-Review: May 2020

After a dismal start to the second quarter, a number of May economic numbers were reported as better than expected, suggesting the economy may be faring better than at least some of the more dire or worst-case scenario forecasts. Of course, while a minimal nominal improvement, on a relative basis, the U.S. economy appeared to simply be rising from terrible to not quite as terrible in Q2. After all, while a step in the right direction, a slightly improved reading in regional manufacturing and income, for example, hardly offsets the lingering pain evident in nearly every sector of the economy as a result of the forced economic shutdown displacing millions of American workers and businesses.

Market Activity and Commodities

·      Equities – Equities ended May higher after posting their best month since January 1987 in April; beginning at 2,912.43, the S&P 500 rose 4.5% in May, closing at 3,044.31. The Dow, meanwhile, gained 4.3% in May from 24,345.72 to 25,383.11. For the year, the S&P 500 and Dow are down 11% and 5.8%, respectively.

·      Treasuries – Treasury yields ended the month of May mixed. The 10-yr Treasury yield rose 1bp from 0.64% to 0.65% in the second month of Q2. The 2-yr Treasury yield, meanwhile, fell 4bps in May, closing at 0.16%, after reaching a low of 0.14% on the 7th. Since the start of 2020, the 2-yr dropped 141bps and the 10-year declined 127bps.

·      Oil      

o  (May 14) – According to the IEA’s closely-watched monthly report, crude demand showed a fall of 8.6M bpd to 91.2M for 2020, while on the supply side, it expected a decline of 12M bpd in May, falling to a nine-year low of 88M. Oil prices traded up 2.7% at $25.97 a barrel following the report.

National Growth and Outlook

·      NFIB Small Business Optimism (May 12) – The NFIB Small Business Optimism Index fell 5.5 points from 96.4 to a reading of 90.9 in April, less than the expected decline to a reading of 83.0, according to Bloomberg, albeit the lowest reading since March 2013.

·      Leading Index (May 21) – The Leading Index fell 4.4% in April, less than the expected 5.4% decline, according to Bloomberg, albeit the third consecutive month of decline and following a 7.4% decline in March, the largest decline on record.

·      Chicago Fed National Activity Index (May 26) – The Chicago Fed National Activity Index unexpectedly declined from -4.97, revised down from -4.19, to a reading of -16.74 in April, the lowest reading on record. According to Bloomberg, the index was expected to rise to a reading of -3.50 at the start of the second quarter. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In April, 6 of the 85 monthly individual indicators made positive contributions, while 79 made negative contributions.

·      GDP (May 28) – GDP was revised down from a 4.8% decline to a 5.0% decline in the second-round first quarter report, the steepest contraction since Q4 2008. According to Bloomberg, GDP was expected to be unrevised at -4.8%. Personal consumption was revised up from a 7.6% decline to a 6.8% decline in the second-round Q1 report, still the largest quarterly decline since the second quarter of 1980. Goods consumption was revised up into positive territory from a 1.3% decline to a 0.2% increase due to upward revisions in durable and nondurable goods; durable goods was revised up from a 16.1% drop to a 13.2% decline, still the largest quarterly decline since Q4 2008. Nondurable goods orders, meanwhile, was revised up from a 6.9% gain to a 7.7% increase in the second-round first quarter report, following a 0.6% decline in Q4. Services consumption was revised higher from a 10.2% decline to a 9.7% drop in the second-round Q1 report, following a 2.4% gain in Q4. Gross private investment was revised down from a 5.6% decline to a 10.5% decline, the fourth consecutive quarter of decline, due to a downward revision in inventories from -$16.3B to -$67.2B. Fixed investment was revised up two-tenths of a percentage point to a 2.4% decline in the first quarter, following a 0.6% decline the quarter prior. Nonresidential investment, including office buildings and factories, was revised up from an 8.6% decline to a 7.9% decline, still the largest quarterly decline since Q2 2009, due upward revisions in structures investment and intellectual property investment; structures investment was revised up from a 9.7% drop to a 3.9% decline and intellectual property investment was revised higher from a 0.4% increase to a 1.0% gain. Equipment investment, however, was revised down from a 15.2% decline to a 16.7% drop. Additionally, residential investment was revised down from a 21.0% gain to an 18.5% gain in the second-round first quarter report. On the trade side, exports were unrevised from an 8.7% decline, while imports were revised down from a 15.3% decline to a 15.5% drop in Q1, following an 8.4% decline at the end of last year. Government consumption was revised up a tenth of a percentage point to a 0.8% gain, still the weakest pace in five quarters.

Employment

·      Jobless Claims

o  (May 7) – Initial jobless claims totaled 3.2M in the week ending May 2 following a rise of 3.8M the week prior. According to Bloomberg, claims were expected to rise by 3.0M. A total of 33.5M applications for unemployment insurance have been filed over the past seven weeks due to the impact from the coronavirus. The four-week average, however, declined from 5.0M to 4.1M.

o  (May 14) – Initial jobless claims totaled 3.0M in the week ending May 9, following a total of 3.2M claims the week prior. According to Bloomberg, jobless claims were expected to total 2.5M. A total of 36.5M applications for unemployment insurance have been filed over the past two months due to the impact from the coronavirus. The four-week average declined from 4.1M to 3.6M.

o  (May 21) – Initial jobless claims totaled 2.4M in the week ending May 16, as expected, according to Bloomberg, and following a total of 2.7M the week prior. A total of 38.6M applications for unemployment insurance have been filed over the past nine weeks due to the impact from the coronavirus. The four-week average fell from 3.5M to 3.0M.

o  (May 28) – Initial jobless claims totaled 2.1M in the week ending May 23, as expected, according to Bloomberg, and following a total of 2.4M the week prior. A total of 40.8M applications for unemployment insurance have been filed over the past ten weeks due to the impact from the coronavirus. The four-week average fell from 3.0M to 2.6M.

·      Nonfarm Payrolls (May 8) – Nonfarm payrolls dropped an unprecedented 20.5M in April, less than the 22M decline expected, according to Bloomberg, albeit the largest decline on record. March payrolls, however, were revised down from a 701K decline to an 870K decline, and February payrolls were revised down from 275K to 230K. Thus, the overall change in nonfarm payrolls (April data + net revisions) was -20.7M. In the details, private payrolls dropped by 19.5M in April, following an 842K decline in March. Goods-producing payrolls fell 2.4M due to a 975K decline in construction payrolls. Manufacturing payrolls, meanwhile, dropped 1.3M at the start of the second quarter, following a 34K decline in March. Service producing payrolls dropped by 17.2M in April, following a 768K fall the month prior. Education and health payrolls fell 2.5M, and business services payrolls declined 2.1M, due to an 842K drop in temporary help payrolls. Also, leisure and hospitality payrolls plummeted 7.7M, financial payrolls declined 262K, and trade and transport payrolls fell 3.0M, due to a 2.1M drop in retail payrolls in April. Information payrolls, meanwhile, fell 254K in April following a 4K decline the month prior, and government payrolls declined 980K in April despite federal employment rising 1K.

·      Participation Rate (May 8) – The civilian labor force fell by 6.4M in April, following a 1.6M decline in March. As a result, the participation rate fell from 62.7% to 60.2% in April.

·      Unemployment Rate (May 8) – Household employment fell by 24.4M in April, following a 3.0M decline the month prior. With a 6.4M decline in the labor force, the unemployment rate more than tripled from 4.4% to a record 14.7% in April.

·      Average Hourly Earnings (May 8) – Average hourly earnings rose 4.7% in April, surpassing the 0.4% rise expected, according to Bloomberg. Year-over-year, wages rose 7.9%, the highest on record.

·      Average Weekly Hours (May 8) – The average workweek rose from 34.0 to 34.2 hours in April.

·     JOLTS (May 15) – According to JOLTS – the Job Openings and Labor Turnover Survey – the number of job openings dropped from 7.00M, revised up from 6.88M originally reported, to 6.19M in March, the lowest level since May 2017. According to Bloomberg, job openings were expected to fall to 5.80M.

Consumer Activity and Confidence

·      Vehicle Sales (May 1) – Total vehicle sales declined from 11.37m to a 8.58m unit pace in April, less than the decline to 7.00m expected, according to Bloomberg, albeit a record low. Year-over-year, vehicle sales dropped 48% at the end of the first quarter, following a 35% decline in February.

·      Consumer Credit (Mar 7) – Consumer credit unexpectedly fell $12.04B in March, the largest decline in a decade and following a $19.92B gain in February. According to Bloomberg, consumer credit was expected to rise $15.000B at the end of the first quarter.

·      University of Michigan Consumer Sentiment

o  (May 15) – The University of Michigan Consumer Sentiment Index unexpectedly rose from 71.8, the lowest reading since December 2011, to a reading of 73.7 in May, a two-month high. According to Bloomberg, the index was expected to decline to a reading of 68.0 in April. In the details, current conditions rose from 74.3 to a reading of 83.0, while consumer expectations fell from 70.1 to a reading of 67.7 the lowest reading since November 2013.

o  (May 29) – The University of Michigan Consumer Sentiment Index unexpectedly fell from a preliminary report of 73.7 to a final reading of 72.3 in May, still a two-month high. According to Bloomberg, confidence was expected to rise to a reading of 74.0 in the final May report. In the details, consumers’ assessment of current conditions declined from 83.0 to 82.3, and consumer expectations fell from 67.7 to a reading of 65.9 in the final May report, the lowest reading since October 2013.

·      Retail Sales (May 15) – Retail sales plunged 16.4% in April, the largest decline on record, and following an 8.3% decline the month prior. According to Bloomberg, retail sales were expected to fall 12.0% at the start of the second quarter. Year-over-year, retail sales fell 21.6% in April. Car sales fell 12.4% in April following a 25.7% decline the month prior, and gasoline stations sales dropped 28.8%, following a 16.5% decline the month prior. Excluding autos, retail sales fell 17.2% in April and declined 18.8% over the past 12 months. Excluding autos and gasoline, retail sales declined 16.2% in April and dropped 16.0% year-over-year. In the details, non-store retailer sales increased 8.4% in April, following a 4.9% gain the month prior. On the weaker side, building materials sales fell 3.5%, health and personal care sales declined 15.2%, and food and beverage sales dropped 13.1%, following a 26.9% rise the month prior. Also, general merchandise sales declined 20.8%, thanks to a 28.9% drop in department store sales, clothing sales plunged 78.8%, furniture sales dropped 58.7%, and electronics sales declined 60.6%. Additionally, eating and drinking sales fell 29.5%, sporting goods sales declined 38.0%, and miscellaneous sales decreased 24.7%.

·      Consumer Confidence (May 26) – The Conference Board’s Consumer Confidence Index rose from 85.7, revised down from 86.9, to a reading of 86.6 in May, less than the rise to 87.0 expected, according to Bloomberg, albeit a two-month high. In the details, consumer expectations rose from 94.3 to 96.9, while present situation fell from 73.0 to 71.1, the lowest level since August 2013.

Inflation

·      CPI (May 12) – The CPI fell 0.8% in April, as expected, according to Bloomberg, and the largest monthly decrease since December 2008. Year-over-year, the CPI rose 0.3% in April, down from 1.5% the month prior, and the weakest pace since December 2015. Food prices rose 1.5% following a 0.3% gain the month prior, while energy prices dropped 10.1% at the start of the second quarter, the third consecutive month of decline. Excluding food and energy costs, the core CPI fell 0.4% and increased 1.4% over the past 12 months, the weakest pace since April 2011. In the details, medical care prices gained 0.4% at the start of the second quarter, matching the pace the month prior. Additionally, education and communication costs increased 0.1%, thanks to a 0.7% gain in personal computer prices. On the weaker side, housing prices were flat, despite a 0.2% gain in the OER, services costs fell 0.3%, recreation prices declined 0.2%, and transportation prices dropped 5.9%, the fourth consecutive month of decline. Also, apparel prices fell 4.7%, and commodities prices declined 1.6%, also the fourth consecutive month of decline.

·      PPI (May 13) – The PPI dropped 1.3% in April, more than 0.5% decline expected, according to Bloomberg, and the largest monthly decline on record. Year-over-year, the PPI fell 1.2% at the start of the second quarter, the largest decline since November 2015. Food prices fell 0.5%, a two-month low, while energy prices dropped 19.0% at the start of the second quarter, following a 6.7% decline in March. Excluding food and energy costs, the core PPI fell 0.3% and increased 0.6% over the past 12 months, the weakest pace since December 2015. Additionally, services costs fell 0.2%, due to a 3.5% decline in transportation and warehousing costs. Trade costs, however, rose 1.6% at the start of the second quarter following a 1.4% rise the month prior.

·      PCE (May 29) – The PCE fell 0.5% in April, a tenth of a percentage point less than expected, according to Bloomberg, and following a 0.2% decline in March. Year-over-year, headline inflation increased 0.5%, the weakest pace since December 2015 and following a 1.3% gain in March. Excluding food and energy, the core PCE fell 0.4% in April after being flat in March. Year-over-year, core inflation increased 1.0%, the weakest pace since December 2010.

Manufacturing and Production Activity

·      ISM Manufacturing (May 1) – The ISM Manufacturing Index fell from 49.1 to a 41.5 in April, less than the decline to 36.0 expected, according to Bloomberg, albeit the lowest reading since April 2009. In the details, supplier deliveries jumped from 65.0 to 76.0, and imports rose from 42.1 to 42.7 at the start of the second quarter, a three-month high. On the weaker side, backlog of orders fell from 45.9 to 37.8, employment dropped from 43.8 to 27.5, and prices paid declined from 37.4 to 35.3, the lowest reading since January 2016. Additionally, new orders fell from 42.2 to 27.1, and production decreased from 47.7 to 27.5. Also, exports fell from 46.6 to 35.3, the lowest reading since December 2008.

·      Factory Orders (May 4) – Factory orders dropped 10.3% in March, more than the 9.7% decline expected, according to Bloomberg and the largest decline in the history of the index – the previous record decline was 9.7% reached in August 2014.

·      ISM Non-Manufacturing (May 5) – The ISM Non-Manufacturing Index declined from 52.4 to a reading of 41.8 in April, less than the expected decline to a reading of 38.0, according to Bloomberg, albeit the lowest reading since March 2009. In the details, supplier deliveries rose from 62.1 to 78.3, and prices paid increased from 50.0 to 55.1, and imports gained from 40.2 to 49.2, a two-month high. On the weaker side, new orders dropped from 52.9 to 32.9, backlog of orders declined from 55.0 to 47.7, employment fell from 47.0 to an all-time low of 30.0, and exports dropped from 45.9 to 36.3 in April.

·      Empire Manufacturing (May 15) – The Empire Manufacturing Index rose from a record low of -78.2 to a reading of -48.5 in May, more than the expected rise to a reading of -60.0, according to Bloomberg. In the details, shipments rose from -68.1 to -39.0, new orders increased from -66.3 to -42.4, employment improved from a record low of -55.3 to

-6.1 in May, and the average workweek gained 40 points from an all-time low of -61.6 to a reading of -21.6. On the weaker side, prices paid fell from 5.8 to 4.1 in May.

·      Industrial Production (May 15) – Industrial production fell a record 11.2% in April. According to Bloomberg, production was expected to decline 12% in April.

·      Capacity Utilization (May 15) – Capacity utilization fell from 72.7% to an all-time low of 64.9% in April. According to Bloomberg, capacity utilization was expected to decrease to 63.9% at the start of Q2.

·      Philly Fed Business Outlook Survey (May 21) – The Philly Fed Index rose from -56.6, the weakest reading since July 1980, to -43.1 in May, less than the expected rise to a reading of -40.0, according to Bloomberg, and the third consecutive month of a negative reading. In the details, new orders rose from -70.9 to a reading of -25.7, shipments improved from -74.1 to -30.3, and inventories increased from -10.2 to +11.7 in May, a three-month high. Additionally, prices paid rose from -9.3 to +3.2, and employment increased from -46.7 to a reading of -15.3. On the weaker side, delivery time dropped from +4.1 to -6.7, a two-month low.

·      Dallas Fed Manufacturing (May 26) – The Dallas Fed Manufacturing Outlook Index rose from a record low reading of -70 to a reading of -49.2 in May, more than the expected rise to -61.0, according to Bloomberg, albeit the third consecutive month of decline.

·      Richmond Fed Manufacturing (May 27) – The Richmond Fed Index rose from an all-time low of -53 to a reading of -27 in May, more than the expected rise to a reading of -40, according to Bloomberg, and a two-month high.

·      Kansas City Fed Manufacturing (May 28) – The Kansas City Fed Index rose from -30 to a reading of -19 in May, more than the expected rise to a reading of -21, according to Bloomberg, albeit the third consecutive month of a negative reading.

·      Durable Goods (May 28) – Durable goods orders fell 17.2% in April, less than the 19.0% decline expected, according to Bloomberg, albeit the largest decline since August 2014. February orders, meanwhile, were revised down from a 14.7% decline to a 16.6% drop. Year-over-year, headline orders fell 29.4% at the start of the second quarter, the most since July 2009 and following a 18.5% decline in March. Transportation orders dropped 47.3%, following a 43.1% decline the month prior, due to a 46.9% drop in civilian aircraft orders and a 52.8% fall in vehicles and parts orders. Excluding transportation, durable goods orders fell 7.4% in April and declined 9.7% over the past 12 months. In other details, electrical equipment orders fell 7.8%, following a 0.7% rise the month prior, and computers and electronics orders dipped 0.3%. Additionally, fabricated metals orders dropped 12.0%, primary metals orders declined 13.8%, and machinery orders declined 6.8% in March, the third consecutive month of decline.

·      Capital Goods (May 28) – Capital goods orders fell 1.8% in April. Nondefense capital goods orders, however, rose 8.2% at the start of the second quarter, following a 35.2% drop in March. Capital goods orders excluding aircraft and defense – a proxy for business investment – fell 5.8% in April, the third consecutive month of decline. Year-over-year, business investment declined 7.3% after being flat the month prior, and further below a recent peak of 13.3% in September 2017.

·      Chicago PMI (May 28) – The Chicago PMI unexpectedly declined from 35.4 to a reading of 32.3 in May, the lowest reading since March 1982. According to Bloomberg, the index was expected to rise to a reading of 40.0 in the second month of Q2. In the details, three of the five components – prices paid, inventories and supplier deliveries – rose in the second month of Q2.

Housing Market Activity

·      Construction Spending (May 1) – Construction spending unexpectedly rose 0.9% in March, following a 1.3% decline the month prior. According to Bloomberg, construction spending was expected to drop 3.5% at the end of the first quarter. Construction spending has averaged 1.0% over the last six months and rose 6.7% year-over-year, a four-month low.

·      NAHB Housing Market Index (May 15) – The NAHB Housing Market Index rose from 30 to a reading of 37 in May, more than the expected rise to a reading of 35, according to Bloomberg, and a two-month high.

·      Building Permits (May 19) – Building permits dropped 20.8% in April from 1,356k, revised up from 1,353k, to a 1,074k unit pace, the weakest pace since January 2015. According to Bloomberg, building permits were expected to decline 25.9% at the start of the second quarter. Year-over-year, building permits fell 19.2%, following a 2.2% gain. Multi-family permits dropped 15.3% but fell 24.5% year-over-year, while single family permits decreased 24.7% in April and fell 16.8% over the past 12 months, the largest decline since March 2011.

·      Housing Starts (May 19) – Housing starts plunged a record 30.2% in April, pulling the annual pace down from 1,276k, revised higher from 1,216k, to 891k, the weakest pace since February 2015. According to Bloomberg, starts were expected to drop 26.0% at the start of the second quarter. Single family starts fell 25.4%, and multi-family starts dropped 40.5% in April, following a 24.0% decline the month prior. Year-over-year, housing starts dropped 29.7% in April, following a 6.4% increase in March. On a regional basis, starts fell in all four regions of the country in April: starts declined 40.0% in the Northeast, 10.8% in the Midwest, 3.7% in the South, and 7.8% in the West.

·      Existing Home Sales (May 21) – Existing home sales fell 17.8% in April from 5.27m to a 4.33m unit pace, the largest decline in nearly ten years. According to Bloomberg, existing home sales were expected to fall 19.9% at the start of the second quarter. Single family sales fell 16.9%, and multi-family sales dropped 26.4%. Year-over-year, existing home sales fell 17.2% following a 0.8% gain in March. From a price standpoint, the median cost of a previously owned home rose 7.4% in April from a year earlier to $287k.

·      New Home Sales (May 26) – New home unexpectedly rose 0.6% from 619k, revised down from 627k, to a 623k unit pace, a two-month high. According to Bloomberg, new home sales were expected to drop 23.4% at the start of the second quarter. Year-over-year, sales fell 6.2% following an 11.6% decline in March. The months’ supply of new homes fell from 6.4 to 6.3 months, a two-month low. And, from a price standpoint, the median cost of a newly constructed home fell 5.2% in April from the month prior to $310k. Year-over-year, new home prices fell 8.6% following a 5.2% rise in March.

·      S&P/CS 20 City Index (May 26) – The S&P Case-Shiller 20 City Home Price Index rose 0.47% in March, more than the 0.30% gain expected, according to Bloomberg, and following a 0.50% gain in February. Year-over-year, home prices rose 3.92%, the most since December 2018.

·      Pending Home Sales (May 28) – Pending home sales dropped 21.8% in April, more than the 17.3% decline expected, according to Bloomberg, the largest decline since May 2010 and following a 20.8% decline in March. Year-over-year, pending home sales dropped 33.8%, the largest decline since the National Association of Realtors (NAR) began tracking this metric in January 2001 and following a 14.5% decline the month prior.

Trade and Currency

·      U.S. Dollar

o  (May 26) – The dollar rose following mounting tensions between China and the U.S. over the new security law for Hong Kong. The dollar traded up 0.3% at $99.207.

·      Trade (May 5) – The trade balance widened from $39.9b to $44.4b in March, the most in two months. According to Bloomberg, the deficit was expected to widen to $44.2b. Imports fell 6.2% from $247.6b to $232.2b, the lowest figure since October 2016, and exports fell 9.6% from $207.8b to $187.8b in March, the lowest since November 2016. Imports from China specifically fell 13.0% in March to $19.85 billion, while exports to China rose 17.0% to $7.97 billion.

·      Import Prices (May 14) – Import prices declined 2.6% in April, less than the 3.2% decline expected, according to Bloomberg, and the third consecutive month of decline. Year-over-year, import prices dropped 6.8% at the start of Q2, the largest decline since December 2015.

Monetary Policy, Reports, and Commentary

·      Atlanta Fed GDPNow Forecast

o  (May 15) – Following the larger-than-expected 16.4% drop in retail sales in April, the largest decline on record, the Atlanta Fed GDPNow forecast was revised down from a 35.2% decline to a 42.8% drop in the second quarter. However, according to the Atlanta Fed, it is important to note: “GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 beyond its impact on GDP source data and relevant economic reports that have already been released. It does not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the model.”

·      Fed Speak

o  (May 13) – Speaking on a webinar hosted by the Peterson Institute for International Economics, Chairman Powell outlined a worrying scenario suggesting potential lasting consequences to the U.S. economy resulting from the pandemic – or more specifically the policies put in place to stem the spread of COVID-19 – including mass bankruptcies and heightened unemployment. “The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems,” Powell said. The Chairman, however, suggested there is still potentially more officials can do – an insinuation that follows the Fed’s unprecedented decision to begin buying exchange-traded funds invested in corporate debt to support liquidity in the market where large companies borrow. “While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks,” Powell said reaffirming a willingness to “continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way.” While acknowledging the potential “costs” of policy intervention, the Chairman voiced support for such action – both on the monetary and fiscal side – if it “helps avoid long-term economic damage and leaves us with a stronger recovery.”

o  (May 18) – Speaking on CBS's 60 Minutes, Federal Reserve Chairman Jerome Powell reaffirmed the Fed’s support for the economy: "The Fed hasn't run out of ammunition by a long shot. There's really no limit to what we can do in lending programs." Furthermore, despite an expected near 30% decline in GDP in the second quarter, and assuming there is not a second wave of the virus, Powell mentioned that the economy can “recover steadily through the second half of this year.”

o  (May 19) – Federal Reserve Chairman Jerome Powell testified before the Senate Banking Committee alongside Treasury Secretary Steven Mnuchin on the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. Echoing earlier comments, Powell reiterated a likely long and hard road ahead for the U.S. economy, prompting the need for additional stimulus both from the Federal Reserve and the federal government, nothing that the "scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II."

·      April 29th FOMC Meeting Minutes

o  The FOMC left rates unchanged at the April 29th with the federal funds target stable at 0.00-0.25%. There was no adjustment to QE and no announcement of an additional liquidity program. After all, the Fed had already committed to unlimited asset purchases as well as to provide liquidity to any market deemed necessary, essentially pulling out all the stops to aid in stabilizing the U.S. market. The minutes of the April 29th FOMC meeting, however, revealed that policy makers were concerned that the unprecedented economic shutdown due to the coronavirus would disproportionately impact small businesses: “Participants also noted the disproportionate burdens or particular challenges being faced by small businesses; these challenges included lower cash buffers, fewer financing options, and, more recently, tighter lending standards.” The minutes also revealed that officials are concerned that a second outbreak “may cause businesses for some time to be reluctant to engage in new projects, rehire workers, or make new capital expenditures.” Additionally, some members commented on the Committee’s forward guidance, nothing that the Committee should make its forward guidance for the path for the federal funds rate more explicit.

Domestic News and Activity 

·      Politics and the Trump Administration

o  (May 1) – The spread of the coronavirus continued with over 1M cases and more than 63K deaths reported in the U.S. Yet, a number of states began to ease restrictions including Alabama, Tennessee, Colorado and Texas. According to reports, Georgia, Oklahoma, Alaska and South Carolina were the first states to allow some businesses including nail salons, barbers and retail stores – with social distancing rules implemented – to reopen.

o  (May 1) – The Trump administration considered retaliatory measures against Beijing for the handling – mishandling – of information regarding COVID-19. "We signed a trade deal where they're supposed to buy, and they've been buying a lot, actually. But that now becomes secondary to what took place with the virus," President Trump told reporters. While a retaliation in the trade war was an option, according to reports, officials also considered alternatives such as sanctions, non-tariff trade restrictions and lifting China's sovereign immunity (allowing lawsuits against Beijing in U.S. courts).

o  (May 1) – Early indications suggested there may have been fraudulent activity when it came to the government’s $349 billion Paycheck Protection Program (PPP) launched April 3. The program was intended to help bridge the gap for small businesses struggling to pay rent and make payroll. But the lack of oversight, not to mention brevity in which the program was rolled out, left it vulnerable to fraud. The Department of Justice opened an investigation into the program.

o  (May 4) – Speaking at a Fox News virtual town hall at the Lincoln Memorial, President Trump said China made a "horrible mistake" and the U.S. government was putting together a report that would be "very conclusive.” According to reports, as a result of the coronavirus and more importantly, the highlighted reliance of the U.S. on Chinese goods, the administration was looking for ways to move supply chains away from Beijing. Secretary of State Mike Pompeo suggested such discussions included "how we restructure ... supply chains to prevent something like this [coronavirus economic fallout] from ever happening again," after citing "significant evidence" that COVID-19 emerged from a Chinese laboratory. Tax incentives and potential re-shoring subsidies were among measures considered to spur changes, while the U.S. pushed to create an alliance of "trusted partners" dubbed the "Economic Prosperity Network." "We've been working on [reducing the reliance of our supply chains in China] over the last few years but we are now turbo-charging that initiative," added Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the U.S. State Department. As the pandemic revealed, the U.S. relies on overseas producers – specifically China – for 30% of PPE, 40% of finished medications and 80% of active pharmaceutical ingredients, an imbalance which leaves the U.S. very vulnerable in times of catastrophe. As a matter of national security, many in the administration were pushing to bring production of these vital, lifesaving elements back to the U.S.

o  (May 4) – According to adviser Larry Kudlow, the Trump administration may have “waited a little bit too long when the last tranche ran out. Let's not make the same mistake again." Speaking to CNN’s Jake Tapper on “State of the Union,” Kudlow indicated he was in no rush to provide more funds to individuals with the administration already spending nearly $525B in enhanced medical and unemployment benefits, as well as direct payment assistance reaching more than 175M Americans. The government loan program, however, is already on its second round. Initially, $349B was approved in March – the program opened on April 3rd before running out 13 days later. A second round of $310B was allocated on April 27th with $175B in loans approved.

o  (May 4) – According to Former Food and Drug Administration commissioner Scott Gottleib, the new estimate for COVID-19 related deaths in the U.S. was up to 100k. The key to containing the virus, meanwhile, remains testing and an eventual vaccine. However, experts suggested the estimated timeline for a vaccine is still very murky at best, with some seeing a solution by the end of the year, while others said it cannot be reasonably expected until the end of 2021.

o  (May 5) – The Treasury announced it would borrow a record $3T this quarter to subsidize economic rescue efforts due to COVID-19. That's on top of first-quarter borrowing of $477B and an anticipated $677B for the third quarter. Taken together, national debt is near $25T, or more than 100% of the overall economy, meaning for the first time since World War II, the nation will owe more than the economy can produce in a given year.

o  (May 6) – Speaking to reporters in Arizona, President Trump indicated that restarting business activity was key and said "we have to get our country open and we have to get it open soon." At that point, at least 35 states have initiated some phase of reopening, although at least five have extended their stay at home orders through the end of May.

o  (May 6) – The airline industry grounded effectively 50% of its fleet. According to reports, U.S. airlines were averaging just 17 passengers per domestic flight and 29 passengers per international flight. The industry is "burning more than $10B in cash a month," trade group Airlines for America warned in prepared testimony. U.S. hospitals, meanwhile, are reportedly losing around $50B per month due to the large number of cancelled elective procedures, costs associated with treating COVID-19 and an increased number of uninsured patients.

o  (May 29) – President Trump said he would revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China in response to Beijing’s decision to impose a national security law on Hong Kong.

o  (May 30) – Widespread protests took place across the United States following the death of George Floyd in police custody in Minneapolis, Minnesota, marking the worst civil unrest the country has seen in decades. The nationwide protests erupted after video footage shared widely on social media showed George Floyd’s killing by an officer, Derek Chauvin, after being arrested. Derek Chauvin and three other officers involved in the arrest were immediately fired and Chauvin was initially charged with third-degree murder and manslaughter. While most of the protests were peaceful, many turned violent, forcing cities to enact strict curfews and heavy police or National Guard presence.

International News and Activity 

·      European Union

o  (May 5) – Sweden’s GDP fell 0.3% in Q1 compared to a 5.2% and 5.8% fallout in Spain and France, respectively. The minimal drop suggested Sweden’s relaxed approach to COVID-19 may have been the more desirable route, at least from an economic stimulus standpoint.

o  (May 5) – The ECB faced pushback from the region’s largest economy after Germany's top court ruled that some actions taken by the country's Bundesbank to participate in the ECB's €2.7T bond-buying program were unconstitutional, and not backed by the EU treaty. As reported by Bloomberg News, the ECB has three months to ensure its bond buying program is proportional or the Bundesbank will be barred from participation.

·      The U.K.

o  (May 13) – The U.K. economy shrank a record 5.8% pace in March due to the economic fallout from the coronavirus. In the first quarter, GDP in the U.K. fell 2%, its largest drop since the financial crisis.

·      China

o  (May 22) – China announced it would impose new controversial national security laws on Hong Kong, leading to more protests and escalating tensions with the United States. The new law is part of a broader push by Chinese President Xi Jinping to strengthen national security.

-Lindsey Piegza, Ph.D., Chief Economist