HIGHLIGHTS OF THE WEEK
- Another eventful week for financial markets as they digested the news that Congress had agreed to a giant $2 trillion relief bill.
- Stimulus is sorely needed, with more than three million Americans filing for unemployment insurance benefits last week. The unemployment rate is expected to hit double-digits in the coming months as entire sectors of the economy come to a stand-still.
- As closures broadened, we issued a forecast update, where real GDP and employment are expected to fall at an unprecedented pace in Q2. We expect a sizeable rebound in the second half of the year, assisted by substantial fiscal and monetary stimulus.
Fiscal Stimulus on the Way as US COVID-19 Cases Surpass China
Yet another eventful week for financial markets as the coronavirus outbreak intensified and cases in the U.S. surpassed China. Equity markets were on an upswing mid-week on news that Congress agreed to a giant $2 trillion relief bill. Despite the rally, investors continued to seek cash and safe dollar assets. This drove yields on the safest, short-term Treasuries lower and settle into negative territory for the first time in more than four years.
The bad economic data intensified as a record-smashing 3.28 million Americans filed for unemployment benefits for the week that ended on March 21st. This is likely undercounting the number of unemployed workers since self-employed and gig workers do not qualify for unemployment benefits. In addition, many state systems were overwhelmed by the number of applicants. We expect more layoffs in the weeks ahead, with much of the nation’s nonessential businesses closed. This is likely to produce a record rise in the unemployment rate with the highest point likely in April of 12% or higher (see report).
This rapid increase in unemployment was captured in our forecast update this week. Our update assumes disruptions to activity drag into early May. Even as activity rebounds through the end of the quarter, real GDP and employment to fall at an unprecedented pace. We expect a sizeable rebound in the second half of the year, assisted by substantial fiscal and monetary stimulus.
Congress is on the cusp of passing a record setting stimulus package, amounting to $2 trillion in aid to individuals and businesses along with increased federal spending and support for state and local governments (see report). The key feature in terms of near-term support is the more than $500 billion in funding to individuals, made up of a combination of one-time checks and more generous unemployment benefits. Congress has done a good job making cash payments progressive and generous for workers who lose their jobs, many of whom come from lower-wage industries (see report). Policymakers have learned lessons from the financial crisis, where stimulus took the form of tax cuts and more benefits to businesses, that it is better to get stimulus out as quickly as possible, and income support measures are one of the best ways to do that.
It is telling about what an eventful week it has been, when an unscheduled Fed announcement falls to the bottom of the pile of events! The Fed made its previously announced asset purchase program open-ended and included purchases of commercial mortgage-backed securities. It created three new lending facilities, expanded previously created ones and established a “Main Street Business Lending Program” to support lending to small and medium sized businesses (see details).
Finally, Chair Powell acknowledged that the U.S. economy” may well be in a recession”. But that it is a very different sort of recession, since there is nothing fundamentally wrong with the economy. So “there can be a good rebound on the other side of this.” Policymakers actions this week have been the strong response markets were looking for to help ensure that this happens.
Leslie Preston, Senior Economist | 416-983-7053
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