March 25, 2020
At the end of a debate that ran into the early hours on Wednesday, US lawmakers struck a $2 trillion stimulus deal in light of the ongoing coronavirus crisis. That accounts for just over 9% of the US’ 2019 GDP.
After some initial push back from the Democrats, the Senate managed to reach a bipartisan agreement on a historic relief package which will deliver, in the words of Mitch McConnell, the Senate majority leader, a “wartime level of investment”. The deal entails direct payments and jobless benefits to individuals, as well as money to states and businesses worst hit by the pandemic.
Larry Kudlow, director of the White House’s National Economic Council, said the stimulus sets the US economy up for an “economic rebound later this year”. He also commented: “We are heading for a rough period, but it is only going to be weeks we think, weeks and months. It’s not going to be years, that’s for sure.”
The full contents of the package will be made available later today, but already risk assets have been given a leg up in trading, despite a slate of horrid Services PMI readings which arrived yesterday.
The US package is just another paragraph in the new chapter that the world has entered in which everything seems to be epic in size, whether it be government measures or market moves. After India put it’s population in lockdown, one-third of the world’s population – that’s 2.5 billion people – are now under movement restrictions. During the second quarter, this should translate into some of the worst macroeconomic data of the century, if not, of all time. Already, we have some harbingers of what lies ahead – Norway’s unemployment rate, for example, has surged to 10.9%, that’s the highest since 1930 and it hints at what we could expect from other countries around the globe. Weekly jobless claims in the US are probably the most scrutinized macro data point on earth for now: Containing a spike in unemployment – as much as possible – is a clear priority in order to support any potential bounce-back in the economy after the lockdown phase in which consumption and business investment will hit the rocks.
What is important to remember is that economic declines of epic proportions are being met with fiscal and monetary firepower which is also of epic and unseen proportions. To keep liquidity flowing, central banks are on the frontline. In Europe, Christine Lagarde, head of the European Central banks has had her “whatever it takes” moment, stating that ‘there are no limits to our commitment to the euro’, meanwhile the Federal Reserve has unleashed unlimited QE. With fiscal authorities finally joining the party, if they manage to avert a wave of insolvencies and job losses, we believe that while the quarantine-induced recession won’t be sweet, it should at least be short.
Focus now falls on Europe, where discussions about its fiscal response, most likely involving the €500 billion European Stability Mechanism, are ongoing.
Author: Group Investment Office