Head of Macroeconomic Research
Summary: This afternoon, we had another confirmation that the coronavirus is causing unprecedented damage to the U.S. economy. It is hitting severely domestic confidence on the top of those supply chain impacts. The Conference Board consumer confidence index, which is one of the key metrics to follow, is out at 86.9 in April versus 87.9 expected and prior 120. This is the biggest drop on record since 1968.
The present situation index declined by 90.3pts to 76.4 – a monthly slump that has never been seen in previous recessions - and the expectations index surprisingly increased by 7pts to 96.7 – remaining within its long-term range (chart 1). This unexpected rise may be explained by the fact consumers consider that the situation can only get better after being really, really bad.
Somehow, they are more optimistic about the short-term business outlook but they send mixed signals which tends to confirm that uncertainty about the economic outlook continues to weight a lot on consumption expectations. Whereas the percentage of consumers expecting business conditions will improve over the next six months jumped by 21.3pts to 40%, those considering that business conditions will worsen also increased by 9.3pts to 25.7%.
Looking at labor markets, without much surprise, consumers’ perceptions eroded quite a lot compared to the previous month. Only 43.3% of respondents consider that jobs are “plentiful” versus 20% in March. 13.8% of respondents also signal that jobs are’ hard to get” versus 33.6% previously. It is bright clear that the deterioration of the labor market in the coming months will be quite phenomenal, and it suggests that the NFP report for the month of April due this Friday will be very ugly. We expect job destruction will reach at least minus 19 million.
In addition, the share of consumers expecting income to decrease over the next six months skyrocketed to 18.5% in April versus 10.1% in March. It is back to level reached in early 2013 (chart 2). Consumers also slightly downgraded their buying intentions for major appliances and quite sharply for autos. Consumers planning to buy autos within the next six months dropped to its lowest level since 2010, at 2.8% versus 3.8% in the previous month. We anticipate a rebound as soon as the lockdown will be lifted and that there will be more visibility about the economic outlook.
Finally, what is probably the most interesting and underappreciated element is the strong decline in vacation intentions (chart 3). Within the next six months, vacation intentions within the U.S. felt to all-time low at 27.1% and vacation intentions to a foreign country are below those of the GFC at 6.8%. It reinforces our view that the long-term impact of the outbreak on tourism will be massive and as devastating as the impact of a meteorite. It is largely unlikely that the tourist sector will get back to normal this year, given the risk of second or even third wave. The loss caused to the sector will probably take years to be repaired.
The evolution of consumption will be a critical factor once the health crisis will be over. The speed of the recovery will be dependent on sentiment, notably the evolution of consumption. In the United States, it remains the predominant driver of economic growth, accounting for 70% of GDP. It is probably too early to know how the consumers will behave in the coming months. Are we heading towards revenge consumption or an increase in saving? What we know for sure is that a prolonged deterioration in key metrics, such as unemployment and wages, would signal trouble for consumer consumption and could seriously slowdown the recovery.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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