Economic data vs. global policy response: What’s driving markets more?

On a special, remotely recorded edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Head of AIS Business Solutions Sophie Antal Gilbert discussed newly released economic data, recent market performance and the global policy response to the coronavirus.

The coronavirus fallout: Unemployment rises as economy slows

The week of March 23 saw two important data releases that provided a first read on the impacts that government measures to contain the virus are having on the global economy, Eitelman said. The first was flash purchasing managers’ indexes (PMIs)1 for developed markets, such as the U.S., UK, Japan and the eurozone. The preliminary numbers for March indicated a very sharp slowdown from February, he said. “Globally, last month, the PMI numbers were right around 50—essentially, on the cusp between expansion and contracttion. The preliminary numbers for March showed a drop to a level of 36, which is close to where the index bottomed out during the 2008-09 global financial crisis (GFC),” Eitelman remarked.

The second important release came from the U.S., where initial jobless claims for the week of March 15-21 spiked to nearly 3.3 million, Eitelman said. The massive number—the country’s largest on record—is approximately five times larger than it was during the GFC, he noted. For context, the U.S. unemployment rate was hovering around a historical low of 3.5% the past few months, Eitelman added.

“The surge in jobless claims from last week suggest that the country’s unemployment rate is now around 5.5% or slightly more, which marks a very significant degradation in the U.S. labor market,” he stated. Importantly, Eitelman noted that from a contextual standpoint, this level of economic damage was mostly anticipated, and has already largely been priced in by markets.

What drove the recent market rally?

After the sharp drawdowns in recent weeks, financial markets turned in a very strong performance the week of March 23, with the S&P 500® Index up approximately 11% from March 20, as of midday Pacific time on March 27. Eitelman characterized these gains as enormous, noting that some of the midweek rallies in U.S. equities were the largest since the 1930s. Global markets also rebounded sharply, he noted, with the MSCI All Country World Index surging approximately 11% on the week.

Eitelman also noted that credit spreads and other risk assets have compressed in recent days, while the shortage of U.S. dollars globally has abated. While markets are by no means out of the woods, he characterized the recent developments as positive and encouraging signs that some of the very acute stresses from the past few weeks are subsiding. Much of this, Eitelman noted, has been driven by the aggressive policy responses to the coronavirus from governments around the world.

Unpacking the U.S. stimulus package

On the monetary policy front, Eitelman said that the U.S. Federal Reserve (the Fed)’s March 23 announcement that it was committed to unlimited purchases of Treasuries and other securities provides an enormous amount of liquidity into U.S. markets. In addition, the central bank has also started to tap more into its emergency toolbox, particularly with its commitment to buying corporate bonds—both in the primary and second markets, he explained.

Eitelman noted that because there’s only so much the Fed can do in terms of managing rates and financial markets, a strong fiscal response is arguably even more important. That’s why Congress’ recent passage of a $2 trillion relief package is very significant, he said, calling it a tremendous backstop that will help alleviate financial pressures from households and businesses in both the U.S. and across the globe.

The rescue package amounts to roughly 10% of annual U.S. GDP (gross domestic product), Eitelman noted, making it larger in size than the rescue package implemented by the Obama administration in 2009. Among other things, it includes direct checks and income support for consumers, as well as loans to small businesses on the order of $350 billion. If a small business commits to keeping its workers employed throughout the duration of the crisis, these loans could be forgiven, Eitelman said. “Effectively, this amounts to a cash injection—a nicely crafted tool by the U.S. government to help get small businesses to other side,” he remarked. Just as important, the U.S. Treasury Department has also carved out an approximately $450 billion bailout fund, Eitelman noted.

In recent days, other similarly large and significant relief packages have been passed by Australia, Canada, the UK and Germany, he said. “Collectively, this global response is very large and more significant than what we saw even in 2009—and over time, it could establish the groundwork for an eventual economic recovery,” Eitelman concluded.

1The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. An index value above 50 percent indicates a positive development in the industrial sector, whereas a value below 50 percent indicates a negative situation.

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