Authored by Ian Lyngen and Jon Hill of BMO Capital Markets
Service PMIs across the globe cratered during the month of March; Japan, Germany, France, and the UK all experienced dramatic declines in business sentiment as the coronavirus pandemic began to unfold. The dismal reports on the service side underperformed even the estimated weakness – hinting of a market which is struggling to gauge just how bad this will all be for the real economy. On the flipside, manufacturing PMIs came in better than anticipated as a theme – although it’s worth reiterating the context that all PMIs were sub-50 and decidedly in contractionary territory. Risk assets appear to be bouncing at the moment; this is occurring despite the inability of Congress to advance a stimulus bill to address the fallout from Covid-19 – still waiting.
We’ve offered the observation Italy is being viewed as the archetype for the pandemic in terms of speed of contagion and mortality – as imperfect of an estimate as it might ultimately prove. With this backdrop, stock futures hit the limit-up overnight and Treasury yields were modestly higher as the most recent Italian coronavirus stats indicated the growth of new cases might be slowing. In keeping with the theme of ‘moving on’ for parts of the world impacted, transportation to Wuhan is scheduled to resume on April 7 – after new infections fell to zero on March 19. We’ll be the first to suggest there is no obvious roadmap to recovery from this outbreak, although the experience (and response) of other areas has provided at least partial and imperfect information to aid in the domestic reaction.
The dueling concerns of containing the virus and limiting the economic fallout are the obvious driving force behind President Trump’s comments that “America will again, and soon, be open for business. Very soon. A lot sooner than three or four months.” This was also perhaps in response to Bullard’s suggestion the government should shut down the economy for three months; the odds of James replacing Jay anytime soon have been materially lowered. Just an observation.
In contemplating the next several months (of captivity), many have suggested the recession poised to hit the global economy will be unlike any other in history. We’ll sidestep challenging the actual validity of this claim and instead concede it will have a decidedly unique character versus anything experienced in the modern era. Unlike during armed conflicts, when the industrial machine has stepped up production and overshadowed the retrenchment of consumption, there is no real offset to plummeting economic activity. There is a case to be made that the medical equipment and home delivering industries will be booming – however (again using the Wuhan timeline), if the full course of the outbreak/shutdown is 2-3 months, by the time the extra capacity comes on line, consumers will once again be venturing into the great outdoors.
Sure, there have been plenty of predictions made about how the pandemic will forever change society and the way US workers participate in the labor market – home offices will overtake the ‘collaborative workspace’ as the new must-haves (even more bad news for WeWork). Perhaps, but we’ll argue this outlook has a much better probability of coming to fruition if the domestic economy is shutdown for 9-10 months versus 9-10 weeks. This is a challenging stance to take at what appears to be the eye of the hurricane (as it were). We’re reminded that it’s always darkest before the lights go completely out. Alas, we digress.
Instead, what’s currently underway is a test of financial reserves on pretty much every level. Liquidity reserves on the part of central bankers globally, cash reserves for businesses hoping to remain ongoing, and of course households – which could benefit from an additional injection from the Federal government to weather to economic storm. The extent to which the reserves are drawn upon (or completely exhausted) will dictate how much lingering economic damage and social/work-style changes ultimately come to pass. Just food for thought as stocks continue to bounce and Treasury yields define the range