- The European Commission released a very negative report about EU growth.
- The Chicago Fed has a new COVID unemployment rate that is the worst in history.
- The Treasury market sold off a bit, breaking technical support.
The European Commission released its latest EU economic projections, which are dire:
The EU economy is forecast to contract by 7½% in 2020 andgrow by around 6% in 2021
This isn't a surprise when you consider the depth of the current slowdown (see Markit Economics commentary below). The report adds a few key points:
The shock to the EU economy is symmetric in that the pandemic has hit all Member States, but both the drop in output in 2020 (from -4¼% in Poland to -9¾% in Greece) and the strength of the rebound in 2021 are set to differ markedly. Each Member State's economic recovery will depend not only on the evolution of the pandemic in that country, but also on the structure of their economies and their capacity to respond with stabilising policies.
All the economies have locked-down their businesses, which means the drop in output is uniform across the continent. But the recovery will be country-specific. For example, Greece is far more dependent on tourism, which means its recovery will be hampered so long as there isn't a vaccine.
The coronavirus pandemic has severely affected consumer spending, industrial output, investment, trade, capital flows and supply chains.
All GDP components, save for government spending, have dropped sharply.
The Spring Forecast is clouded by a higher than usual degree of uncertainty. It is based on a set of assumptions about the evolution of the coronavirus pandemic and associated containment measures.
Economic forecasting is more about the process than the outcome, allowing economists to think through data relationships. The current situation may cause some correlation coefficients to change markedly, meaning the models aren't as helpful as before.
Markit Economics has released more data. It's terrible. All the reports note that production, new orders, new export orders, and employment are lower. Numerous reports observe that the data is far worse than the drops from the financial crisis. Last month, I noted that manufacturing was holding up remarkably well. No more. Production indexes are registering low 40s at best; some have dropped to the upper 20s.
What's the real unemployment rate? The Chicago Fed has a new model that incorporates the impact of the pandemic:
If we project these changes under different scenarios to get an idea of what we might expect for the April employment report, we get unemployment rates ranging from 8.2% to 16.0%, marking an additional rise ranging from 3.7 to 11.5 percentage points in the official unemployment rate. These are staggeringly large increases, but they pale in comparison to the projected increases in our new measure of between 12.2 and 21.7 percentage points. We project our new measure will rise to between 25.1% and 34.6%.
Here's a chart from the release:
Once again, we have an odd performance table. The QQQ was up modestly. But it was the only equity index in the green. Larger-caps were off modestly. Most importantly, not the sell-off in the TLT, which was down by 1.6%. Further up the table is a drop in the IEF which was down 0.35%. The sector performance table explains why the QQQ was up. The XLK -- one of two sectors to advance today -- was up 81. Consumer discretionary was also up modestly.
The market continues to be remarkably tranquil:Above is the 5-day chart of the SPY. It's what I think of as a center of gravity chart. Prices don't have a firm direction; they're trading around a price level, which acts as a center of gravity.
The post-sell-off rally started with the large-caps, which makes sense, as their size gives them more insulation from the economic downturn. Over the last few weeks, small-caps have rallied as traders gained more confidence in the possible economic rebound. Now Treasuries may be starting to sell off. Assuming this trend continues, it's potentially bullish -- assuming the market survives the Friday employment report.
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