Worst Case Scenario Gets Worse
It’s a sign of the unprecedented times we are living in that the Fed’s emergency rate cut over the weekend and new round of QE wasn’t even the biggest news discussed on Monday. That’s because we are seeing wholesale economic shutdowns previously thought to be impossible. Just a few days ago, charts showed the GDP impact of half the economy being shuttered. People thought that was too far. Now, it looks like that was an optimistic scenario.
On CNBC, it was said that 2/3rds of consumer spending is necessities which will keep going even if the consumer isn’t confident. That’s way too bullish. If the government doesn’t step in with a fiscal stimulus, many won’t be able to afford to pay for basic necessities.
Latest news is San Francisco is requiring people to stay home except for essential needs. New York, New Jersey, and Connecticut are restricting gatherings of 50 or more people. All bars, restaurants, gyms, and casinos are being closed in these 3 states. A recession went from an uncertainty a couple weeks ago to a guarantee. If no fiscal action is taken, this could be a depression.
Empire Fed Index Crashes
We have been starved for economic data because it’s delayed by a couple of weeks. Usually, that doesn’t matter, but in this market, a week feels like a year. This month has felt like 5 years. First economic data has been the consumer sentiment report and the Empire Fed report that came out on Monday. It’s no surprise the Empire Fed report was the weakest since the financial crisis. The economy is in its first recession since 2007-2009.
Specifically, the Empire Fed index fell from 12.9 to -21.5 which missed estimates for 4.8 and the lowest estimate which was -5. That was the lowest reading since March 2009 when it hit -33.7. Worst reading of the recession was February 2009 at -34.3. As you can see from the chart below, this report had the worst 1 month change ever. Manufacturing went from coming out of a recession, to hitting a new trough.
As weak economic data comes in, the market will be closer to fully pricing in the weakness. We’re definitely closer to the bottom than the top. But this is only the first report to miss estimates wildly because of COVID-19. Empire Fed report is the equivalent to an ISM manufacturing PMI of 42.9. That’s very realistic as the manufacturing economy will be in a recession in March. ISM survey period is later on in the month than the Empire Fed report, which is in the first week. Meaning, the ISM PMI can be worse.
Expectations index fell from 12.9 to 1.2. Frankly, It’s surprising that it was above 0. This was the worst reading since February 2009, which was the trough of the last recession. The index fell into the negatives twice in 2009, troughing at -5. Now let’s get into some of the details of the report.
Current new orders index fell 31.4 points to -9.3 and the shipments index fell 20.6 points to -1.7. Number of employees index and the average workweek index fell 8.1 and 9.6 points to -1.5 and -10.6. In the 6 month expectations index, the new orders index fell -9.9 points to 17.6. Shipments index only fell 6 points to 20.5. Capex and tech spending indexes acted like this was a normal month as they only fell 3.3 and 6.8 points to 18.7 and 14.4.
Sunday Rate Cut
Fed cut rates 100 basis points to 0%. Personally, I’m shocked they did it on Sunday instead of Wednesday. The meeting was only in 3 days. Timing didn’t matter; it was a smart move to cut rates. It was also the only move. If the Fed didn’t cut rates, stocks would have plummeted further if that’s even possible. It wasn’t a bad move just because the futures market fell after the action. The market was destined to fall after its greater than 6% rally in the last 35 minutes of the trading session on Friday.
As you can see from the chart below, the 100 basis point cut was the largest move in rates since the Greenspan era. This economic weakness will be sharper than the 2008 financial crisis. The 2008 crisis seemed fast at the time, but it was a slow moving train wreck compared to this situation. So the economy went from being fine, to a mess in a few weeks.
Besides the big rate cut, the Fed also unveiled a new round of QE and repo purchases. QE round will be $700 billion. There will be $500 billion treasuries purchased and $200 billion in mortgage backed securities purchased. Purchases started on Monday with a $40 billion installment.
Fed also offered an additional $500 billion in overnight repo funding markets. This just keeps the financial plumbing going; it’s not stimulus. The Fed also cut the discount window rate 125 basis points to 0.25% and lengthened the term of loans to 90 days. And Fed is trying to reduce the stigma of using the discount window.
End Of Eating Out
The Fed helped, but monetary policy isn’t enough. Mitt Romney called for a $1,000 stimulus check for everyone. Hopefully, that gets done soon to help people pay for necessities. The economic situation is dire. I’m not one to be negative, but this could be a disaster for the middle class and the poor.
As you can see from the chart below, global year over year growth in diners was -31% on March 12th. It was -32% in the U.S. Number of diners has gone from very low to non-existent in many cities. This is going to put restaurants and all their employees in a very tough place.
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