Just in case you didn’t get your fill of dour headlines about the US economy last week, there were plenty more over the weekend.
In an phone interview with Bloomberg, for instance, Jim Bullard warned that the unemployment rate could rise to 30% next quarter, a figure that makes Steve Mnuchin’s worst-case scenario seem relatively benign (Mnuchin reportedly told GOP senators last week that the jobless rate could soar to 20% if drastic action isn’t taken on the fiscal side to shore up the economy).
And that’s not all Bullard said. The notoriously dovish Jim also warned the economy could see a mind-boggling 50% drop in GDP in Q2, a figure so large that one can’t help but chuckle, even as there’s absolutely nothing funny about it.
You’ll note that while Bullard is now the proud owner of the most dour forecast on the block, Morgan Stanley has joined Bridgewater in one-upping Goldman’s estimate of a 24% collapse. Morgan now sees a 30% contraction in Q2, in-line with Bridgewater’s worst-case scenario, as communicated late last week.
“As social distancing and the coronavirus disruptions to economic activity have become more pervasive, the downside to GDP will be increasingly significant”, Morgan writes, projecting a 2.4% contraction for Q1 prior to Q2’s expected 30% swan dive.
And it gets better – or, actually, I suppose “worse” is more apt. “Economic activity has come to a near standstill in March [which] we estimate will mark the first drop in nonfarm payrolls, down 700k”.
Got that? On Morgan’s estimate, we’re going to swing from a February jobs report which showed the US economy adding 273k jobs to a 700k drop, a near 1 million swing in the space of a single month. The unemployment rate, Morgan reckons, will average 12.8% in the second quarter.
But, hey, look at the bright side: Bullard’s estimate is far worse.
When it comes to what else Jim imagines the Fed might be able to do to ameliorate this situation, he told Bloomberg that “everything is on the table”.
“There is more that we can do if necessary” under the Fed’s emergency authority, he said, adding that “there is probably much more in the months ahead depending on where Congress wants to go”.
You can expect one of the first things we’ll see in terms of new tools is a corporate bond-buying program and perhaps an expanded version of the mini-muni bailout announced late last week.
Part of the rescue package currently in the works reportedly involves Treasury guaranteeing some $425 billion in Fed loans and other support to businesses and municipalities. Mnuchin suggested total Fed support to eligible borrowers under new programs could reach $4 trillion, the same figure Ray Dalio’s Bridgewater says US corporates are set to lose in a worst-case scenario.
Corporate bond spreads have ballooned wider in recent days. Junk is now officially in “distressed” territory for the first time since 2009.
“At this point, we estimate US corporate revenue across public and private businesses will decline by roughly $4 trillion”, Bridgewater said Friday, calling it “a very dangerous decline” which, if not mitigated by fiscal and monetary policy, “will lead to a long-lasting ripple”.
The last two weeks have seen guidance withdrawn virtually across the board, while many management teams draw down credit lines and hoard cash in preparation for the inevitable.
Acrimony on Capitol Hill – where lawmakers are rushing to finalize another aid package – boiled over on Sunday, with Senator Tammy Duckworth accusing Republicans of “pushing to give the Trump administration a Mnuchin-controlled slush fund with virtually no oversight, and using the stock market and American lives as leverage”.
Nancy Pelosi said there was no deal with Mitch McConnell as of early Sunday evening in D.C., where Senator Rand Paul tested positive for the virus.
Senator Rand Paul has tested positive for COVID-19. He is feeling fine and is in quarantine. He is asymptomatic and was tested out of an abundance of caution due to his extensive travel and events. He was not aware of any direct contact with any infected person.
— Senator Rand Paul (@RandPaul) March 22, 2020
McConnell did move closer to Democrats over the weekend. The new bill includes increases to unemployment insurance, direct payments of $1,200 per adult and $500 per child, and hundreds of billions in extra spending for a hodgepodge of initiatives.
Restrictions on corporate bailout money include a buyback prohibition, a mandate to maintain employment levels, a two-year comp. freeze for employees making more than $425,000, and a ban on golden parachutes.
Democrats were pushing for much (much) more including, but not limited to, additional funds for states and localities, enhanced unemployment insurance and more assistance for Americans laboring under student debt.
As far as markets are concerned, lawmakers are playing with fire.
On September 29, 2008, when the House initially rejected the Wall Street bailout bill, the S&P fell 8.7%.