Macro: Sandcastle economics
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Business Conditions Plummet and Equities Stage Broad Based Advance
Summary: The rapid bounce back that remains a stark contrast to the real economy, main street employment realities and earnings outlook is continuing. Equities taking positive cues from unprecedented fiscal/monetary stimulus measures, hopes a "v-shaped" recovery, a resounding positive sentiment as many Wall Street institutions sounding the all clear calling "the bottom" and a flattening COVID-19 infection curve.
Asian equities are gaining across the region and multiples expanding, Nikkei +2.82%, KOSPI +2.01%, Hang Seng +0.69%, ASX200 +1.73% at the time of writing. Both Aussie stocks and the AUD now sitting at a 1 month high, shrugging off the abysmal NAB Business Conditions survey data today. The survey headlines, both conditions and confidence, fell by a record amount and per NAB’s comment, “business’s outlook is the weakest ever” and highlights the looming recession as one of unprecedented order. Survey data today was accompanied by the Treasuries estimates for June quarter unemployment at 10% but neither AUD nor ASX200 bats an eyelid.
We have previously argued that downside risks could see equity indices hit much lower lows, seeing the potential for the S&P 500 to fall below 2000. However, the substantial measures enacted on the stimulus front and a flatter infection curve likely lessens the downside, but does not limit it completely. The realities unfolding across developed world labour markets, extended lockdowns and the process of “opening up being just that, a process leaves the risk of disappointment at current levels very high.
The ongoing sharp contraction in both the real economy and corporate earnings leaves little margin for error at current above average valuations as the weeks ahead bring a raft of economic data and information to be incorporated into earnings forecasts. Should the present glass half-full prove too little of a buffer with stocks at current levels, we will see the resilience of the bounce back tested, regardless of the unbounded stimulus/Fed bailouts. However, the prospect of fresh lower lows seems to have lessened.
The virus spread may have begun to level off but the real economy effects have not – US jobless claims have soared to almost 17 million in the last 3 weeks illustrating the scale of destruction in labour markets. In Canada employment fell by more than 1 million in March and the employment rate—or the proportion of people aged 15 and older who were employed—fell 3.3 percentage points to 58.5%, the lowest rate since April 1997. Not limited to the US and Canada, here in Australia Seek job ads and ANZ job ads last week collapsing and according to Callam Pickering an economist at Indeed, job posting on Indeed are “tracking 50% below their trend at the same point last year” give us a preview of the employment shock to come. Thursday’s Australia unemployment report will begin to paint the picture, however with the data collected earlier in March the true scale of the dislocations will have only just begun to be incorporated. Aside from the headline unemployment rate, other measures like participation and hours worked will give key reads on the impact to the health of the labour market.
Meanwhile, the S&P 500 cash index is approaching the all-important 50% retracement just as US earnings season kicks off tonight. No doubt bringing key tests for the resilience of the recent rally and bounce in sentiment.
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