The highly anticipated Nonfarm Payroll and Unemployment Report from the U.S. Department of Labor was released Friday morning, showing an unprecedented cut of 20.5 million jobs in the month of April, raising the U.S. unemployment rate to 14.7%.
This surge in unemployment represented both the largest one-month jump and the highest level on record based on monthly Bureau of Labor Statistics data spanning back to 1948. The monthly unemployment rate was estimated to have been as high as 25% which would have matched the unemployment rate at the height of the Great Depression in 1933. In contrast, unemployment hovered around 3.5% for the beginning months of this year.
This Nonfarm Payroll and Unemployment Report footed well with Wednesday’s ADP Research Institute’s private payrolls report for April that showed U.S. job losses of 20.2 million for the month, which was the worst reading in the history since the onset of this private sector survey.
As expected, most job losses were in the retail and leisure industries. The service-providing sector was hit hardest during the month, shedding more than 17 million jobs versus the 2.4 million jobs lost in the goods-producing sector. Job losses were spread throughout small, medium, and large sized businesses. Permanent layoffs are the main employment concern, mostly in the small business sector but also in the other two sectors, as well, as more job cuts and bankruptcies continue to be announced by larger firms.
The April report undercounted many of those out of work because the survey specifically asks whether the applicant is actively looking for another job, which most could not honestly answer “yes” due to the shelter-in-place orders. Federal Reserve Bank of Minneapolis President Neel Kashkari said that “the real [unemployment] number’s probably around 23% or 24%.”
Like the age-old question over the chicken or the egg, the primary question here remains what will come first, consumer demand or job re-hiring? Further labor related questions include how many of the jobless will drop out of the labor force permanently and what will happen to hourly earnings. This last question, in particular, will have a major impact on the course of inflation.
Treasury Yields Fall to Further Record Lows
Thursday, intraday, the two-year U.S. Treasury note yield fell to 0.1250%, surpassing its previous record low of 0.1431% in September 2011 as the U.S. economy struggled to recover from the Great Recession and a European debt crisis was in development. This record low joins several other shorter-term record lows in three to seven-year Treasuries and swaps over the past weeks. The three, five, and seven-year Treasury yields also broke through their recent intraday record lows Thursday. Following the Nonfarm Payroll and Unemployment Report Friday morning, all these yields continued hitting record lows throughout the trading day by falling an additional one to two basis points.
These declines were set off Thursday, led by rate market speculation for money market rates to drop below zero, particularly for the Federal Funds target. This view may be overly aggressive given the Federal Reserve’s consistent stance against negative interest rates and the havoc that negative rates would wreak on the money market fund industry. Nevertheless, attitudes can change, especially considering potential continued economic deterioration. Therefore, despite the currently low probability, negative short-term rates in the future remain on the radar.
The Disconnect Between the Bond and Equity Markets
As several major economies are starting to relax their lockdowns, stocks around the world have rallied from their March lows. The equity market rebound has been supported by massive monetary and fiscal support, as well as recent improvements in the COVID-19 situation in many foreign countries, such as Italy and France.
In the U.S., 44 of the 50 states will be in various stages reopening their economies by Sunday, even though not a single state meets all the federal guidelines for reopening nor are coronavirus cases and deaths coming down nationally outside of the NY-NJ area.
How much this reopening serves to support the economy and bring back jobs depends on demand and how quickly consumers come back to the market. The answer to this is health related and lies in the continued growth, plateau, or drop in pandemic infections and deaths. In the battle of livelihood versus life, life typically wins, meaning the return of the consumer is anticipated to be fearfully slow and likely to recoil if a dreaded second pandemic wave emerges in the midst of global and domestic reopenings. “Reopening” is not the same as “recovery”, it is merely a first step, and a precarious one for now.
The situation around the world remains critical. Global growth is poised for its deepest contraction in a century, leading to investments and gains in government bonds. The domestic and global economic recovery is still forecasted to be gradual, rather than a quick, V-shaped bounce. The forecasts for a decline in corporate profits has fallen more dramatically than in the deepest throes of the great recession. However, this is a contradictory story from the one the equity market is portraying.
One answer to this conflicting markets discrepancy is that the bond markets are looking at the immediate and near term, whereas the stock market is looking two to three years plus down the road. An adjunct to this answer is that, over time, equity investments are the second largest wealth creating instruments one can invest in, after real estate. But timing the equities market is extremely difficult, even for the best investment managers and especially for non-professionals. Missing the bottoms in the equities market can have significant compounded effects over time, in some long-term cases taking returns from positive to negative. Equity investors today could simply be hoping to get in on the bottoms despite the catastrophic economics laid out before them today.
Furthermore, there has been a radical shift in equity investment. The tech-heavy Nasdaq Composite Index on Thursday erased YTD losses that saw an over 20% decline by mid-March. Equity investors have raced toward companies who have stood out during the stay-at-home crisis, like online, automated, and biotechnology businesses. This stands in the face of older industry equities (travel and retailers, for example) that have deteriorated as investors question what the post-lockdown world will look like.
Continued Monetary and Fiscal Support
The Federal Reserve keeps throwing all its monetary weight to support the economy while suggesting that Congress do more on the fiscal side. Congress is gearing up to work on another spending measure that could be as large as $1 trillion as lawmakers seek to prevent a deeper downturn due to the coronavirus outbreak. In doing so, the size of the deficit is seen quadrupling to $4 trillion not only from increased recovery spending but also as a result of depressed tax revenues.
To support all this spending and revenue shortfall, the Treasury is setting to issue a record high $96 billion in quarterly refunding. This will include the auction of a re-booted 20-year Treasury bond on May 20 (the current plan calls for $20 billion in this maturity) as overall issuance is moving from the short end of the curve to the longer end. There is growing speculation of an eventual issuance of a 50-year bond in the coming year.
“Borrowing needs have increased substantially as a result of the federal government’s response to the COVID-19 outbreak,” the Treasury said this week. The Treasury has raised an unprecedented $1.46 trillion on net since the end of March. This financing includes a large amount of cash as the Treasury went on to say that “over the next quarter, Treasury’s cash balance will likely remain elevated as Treasury seeks to maintain prudent liquidity in light of the size and relative uncertainty of COVID-19 related outflows.”
Not only in the U.S., but globally, the issues of soaring debt and the exit of central bank holdings will attract increasing attention as the pandemic crisis eventually subsides.