HIGHLIGHTS OF THE WEEK
- Markets were volatile this week as oil prices plummeted to negative territory for the first time ever. The combination of weak demand and a lack of near-term storage capacity contributed to this strange result.
- COVID-19 and measures to contain it have hit housing activity, with existing home sales falling sharply in March, a precursor to even greater weakness in April.
- Jobless claims remained elevated last week. Congress’ decision to expand the Paycheck Protection Program should keep layoffs from surging higher in the coming weeks.
COVID-19 Sends Oil Prices To Uncharted Territories
Markets saw some volatility this week but stabilized late in the week. The S&P 500 was down 2.6% from close last week (as of writing). The turbulence in the markets was mainly down to extraordinary movements in oil markets, where the WTI price plummeted to around -40 U.S. dollars per barrel! This was the first time ever oil prices fell into negative territory.
As we have written, there was a technical reason for this strange outcome (see report). The oil price quoted reflected the expiring May futures contract, which was driven negative by the combination of weak demand and a lack of readily-available storage capacity. With the contract expired and President Trump tweeting that the American Navy should destroy any Iranian gunboats harassing U.S. vessels, the price rebounded and currently sits at around $16. Nonetheless, with much of the global economy still in lock down keeping a firm lid on oil demand, this may not be the last time that oil prices dip negative.
The leading edge of the pullback in U.S. economic activity was evident in economic data for March released this week. Existing home sales declined by 8.5% in the month even though self-distancing protocols were only mandated by some states half-way through the month. Home sales will surely fall further in April when almost every state shutdown large parts of their economies (Chart 1).
Elsewhere in terms of economic data, the latest weekly jobless claims number continued to point to the devastating impact of the crisis on the labor market. For the week ending on April 18th, 4.4 million people filed for unemployment benefits. This took the total number of jobless claims to over 26 million since the middle of March. This represents almost a fifth of the entire labor force. As a result, the insured unemployment rate rose to 11.3% for the week, the highest it’s ever been (Chart 2).
The only piece of good news from this data release is that the number of people filing claims has been coming down since the beginning of April. This is due in part to employers retaining their employees and workers finding other jobs.
The immensely popular Payroll Protection Program (PPP) has undoubtedly helped employers retain their staff. The $350 billion fund was completely exhausted late last week with many medium and small sized enterprises still needing cash. Congress leaders responded this week by agreeing to provide more aid totaling $484 billion, of which $320 billion will go towards replenishing the PPP. The next step for Congress is to provide aid to state and local governments struggling with their finances. Early reports suggest that this may be an uphill battle due to resistance from some policymakers. We estimate state and local governments will need at least $200 billion to fill in budget gaps created by lost revenue (see report).
As some states show early signs of containing COVID-19, state governors have started to draw up plans to gradually relax restrictions on their economies. While this is encouraging news, states will have to be careful in their approach. Opening up the economy too quickly, without the proper testing infrastructure in place, could lead to a resurgence of the virus and prolonged economic pain.
Sri Thanabalasingam, Senior Economist | 416-413-3117
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