April 3, 2020

Sooner or Later

Total non-farm payroll employment fell by 701,000 in March, and the unemployment rate rose to 4.4 percent. Employment in leisure and hospitality fell sharply, with smaller job losses in other industries.

The Unemployment data was released today, and it was bad. Not only because it showed a recessionary decline, but because every estimate I had access to was painfully off, coming in at only -100K and a pickup of the unemployment rate from 3.5 to 3.8%. This is worth noting in that this week has seen an enormous rise in worst case narratives from both public and private entities. Along with today’s unexpected employment data the overall picture is moving quickly from under control to open ended. In my opinion I think this is both intentional and useful. Intentional because just as the US is under strict behavior guidelines for the private sector, so too are much of the western democracies. Now the same worst case scenarios are coming from the governments harsh predictions resulting from the pandemic.  With that, the unemployment number for April, which could likely be overestimated, could move the markets into a direction that when everyone is looking for the worst, small positive surprises count.

The Markets
The declines for the broad markets this week were more on the back of expectations of the upcoming unemployment data as well as realization beyond those expectations. However, what seemed to capture the narrative was talk about a potential meeting of energy company executives at the White House and unconfirmed conversations between the US, Russia and Saudi Arabia. The outcome was a vigorous move higher in the price of oil that has seen  over a 60% decline in it’s price since the beginning of the pandemic crisis, helped by Saudi and Russian fighting over who could flood the globe with more oil at a time when usage sharply declined. For now, markets could experience less volatility as the typical investment posture at the beginning of a quarter is to wait it out for the string of economic releases that should start to speed up in the second week of April, just in time for more bad news.

The Economy
The challenging mix of results overwhelmed by the unemployment data has kept the markets in an uncertain state. Starting with the PMI (Purchasing Managers Index) for the manufacturing sector, came in at 49.1, unsurprising that much of the economy for production of durables and general products has had mixed data for some time. As a smaller piece of GDP, the companies that include energy are expected some recovery, but how much is less important than those sectors that serve the consumer. Those sectors saw the PMI non-manufacturing data come out at 52.5. This was totally underestimated by economists who expected it to be around 40, far below the level of expansion, which is 50. The number was also at odds with the services industry which by most measure, especially today’s unemployment data, was a huge casualty of the corporate shutdowns. Further uncertainty is that global data isn’t as synchronized as one might expect, or exponentially harsher for countries like Italy than Germany, consider the former has had a much harder time managing the pandemic. This highlights those countries with the most vigorous economies coming into the crises had much more to give up. Perhaps except for China, I’ll leave it there.

External Events
The commotion over oil is curious at best. For some of us who remember the rise in the price of oil to $100 early in the financial crisis, the broad understanding was that energy at that price would cause a recession based on consumer demand for gasoline, heating oil and natural gas. Flash forward to the recent media narrative that suggested oils price decline contributed to the decline in the broad indexes. First, energy is roughly 8.2% of the global economy and 5.8% of the US economy and shrinking. That would suggest energy should have limited effect on the capital markets, with the possible exception of its debt, and therefore this week’s positive news on the commodity couldn’t stop the market declines and, in my opinion, won’t. Further legislation is being hammered out in Washington that includes infrastructure and further aid to small business. Apart from some ideological additions the outcome should amount to over a trillion dollars. But there you have it, this week’s unemployment data was bad, April should be worse and It’s not like the country has been sitting idle, contrary to opposing political opinion. Companies have ramped up the production of necessary masks, gowns, ventilators and respirators, pharmaceutical companies are coming with faster testing materials, potential treatments and trial of possible immunizations. And the preparations made by the public are impressive with growing discipline. Consider that with expectations of the worst and I’m looking for the glimmer of light, with cash in hand. Let’s hope sooner rather than later.