Stimulus fuel returns as job cuts accelerate

The ASX 200 trades around session highs as stimulus prospects buoy e-minis throughout the session. Treasury Secretary Steven Mnuchin has said he is “hopeful” about striking a stimulus deal, fuelling expectations of another round of spending which has been long awaited. Precious metals are trading higher in lockstep with resurgent risk sentiment and a weaker USD, although gold failing to push through resistance at $1,900. The US ISM manufacturing survey and weekly jobless claims are up next, ahead of Friday’s US employment report.

Despite the mild optimism on a fresh stimulus package, the macro picture remains uncertain, with little to dim the prospects of upcoming election uncertainty. A dynamic that could keep risk assets in limbo until there is clarity on the policy path.

Although the presidential debates are unlikely to change voters’ minds, the debacle that ensued earlier this week did nothing to assuage fears of a contested outcome. Trump failed to commit to respecting the integrity of the election results, which raises the stakes on instability and volatility. We should expect an ongoing escalation in the anti-democratic rhetoric from Trump, whose strategy is increasingly leaning toward damning the integrity of the election. Chasing the democratic decay that has already been set in motion and setting the stage for civil unrest across a nation already divided by the toxic hyper partisan political environment. A scenario that could eventuate with factions of the population on either side believing the victory has been stolen. For those few that were hoping to decide post the debate, perhaps the dismal showing was enough to cause a refrain from voting at all.

The Fed can’t print jobs

Meanwhile, outside of stimulus fuelled financial markets in the real economy, the K shaped world that is being entrenched by the COVID-19 recession continues. Employment recoveries are never V-shaped and the ongoing swathes of job losses that have been announced in the last 24 hours alone highlight the ongoing impact of the crisis on “Main Street”.

This should have policymakers increasingly concerned over waves of job losses above COVID-19. American Air, United Airlines, Goldman Sachs, Shell, Disney, Haliburton, Continental AG and Allstate are a handful of the companies announcing large scale cuts and restructures in the past week.

Continued large-scale job losses are not contained to the sectors that bore the brunt of lockdowns like hospitality, tourism and retail, signalling more permanent white-collar job losses. A dynamic that will be negative for consumption and the recovery as companies continue to cost cut amidst a plateauing recovery. A proportion of jobs have recovered from a staggering number that have been lost. This is consistent with lockdowns being lifted and expanding activity from deeply depressed levels, but by no means indicates a return to prior levels of activity.

A shift in consumer behaviour towards a reduced propensity to consume and increased savings which will hamper, both the speed and trajectory of the economic recovery will only be accelerated by ongoing labour market dislocations. Job insecurities and reduced hours weigh on the consumer’s marginal propensity to spend, which sets in motion a vicious cycle with respect to weaker aggregate demand feeding through to reduced business revenues. This whilst businesses continue to suffer the effects of prolonged social distancing measures even as lockdowns are lifted, the combination in turn leads to more job losses. With this is mind a continued focus on fiscal stimulus will be needed. To date the measures can be viewed as a bridge to normalcy, but the rebuild and subsequent recovery will require continued targeted measures to assist the full return in economic activity and creation of jobs.

In reality it will take a long time to return to normal or pre-crisis output levels, it may not be hard to improve economic activity from the sudden stop but don’t confuse that with confirmation of a V-shaped recovery.