No limits: Behind the Fed’s latest steps to support the U.S. economy

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of AIS Business Solutions Sophie Antal Gilbert discussed recent economic headlines, the slowing of the coronavirus and the latest actions the U.S. Federal Reserve (the Fed) is taking to help the economy.

GDP numbers, earnings-season projections paint bleak economic picture

Simply put, economic data released the week of April 27 was horrible, Ristuben said. “We’ve been expecting that the containment measures enacted by governments across the world, which were necessary to slow the spread of the coronavirus, would inflict a massive economic toll on the globe—and now we’re seeing this come through in the data,” he remarked.

Gross domestic product (GDP) in the eurozone declined by 3.8% from the fourth quarter of 2019, Ristuben said—the largest decrease on record. France, Italy and Spain in particular were hit hard, with the GDP growth rate in France alone slumping by 5.8%. The steep contraction in France’s economy comes on the heels of a 0.1% dip in GDP from the fourth quarter of last year, placing the country in a technical recession, Ristuben noted.

“As bad as the eurozone data was, it was actually modestly better in its awfulness than in the U.S., where first-quarter GDP shrank by 4.8%,” he said. U.S. jobless claims for the week of April 19-25 were also terrible, he added, with another 3.8 million Americans filing for unemployment benefits. All told, 30 million jobless claims have been submitted in the past six weeks, a number Ristuben characterized as both staggering and unthinkable.

On the earnings side, 30% of U.S. S&P 500® companies have reported their first-quarter numbers, and the results look equally dismal, Ristuben said. “Blended earnings—which combine results for companies that have reported with estimates from those that haven’t—currently suggest a growth rate of -15%, year-over-year,” he stated.

Spread of coronavirus slows as governments weigh reopenings

Over 3.2 million cases of coronavirus have been confirmed worldwide, with approximately 234,000 deaths. Amid this tragic backdrop, however, there is some hopeful news, Ristuben said. “In the U.S. and many European countries, curves are flattening—in other words, the spread of the coronavirus is slowing. While it’s a bit early to know for sure, it also appears that the number of daily deaths in the U.S. may be decreasing,” he stated, adding that similar trends are also playing out in Europe.

This clearly shows that the lockdowns implemented across the U.S. and Europe during March saved lives, Ristuben said. Many governments are now discussing how and when to safely reopen their economies, which at the very least is a positive sign, he noted.

Fed opens up Main Street Lending Program to larger businesses

Turning to the Fed, Ristuben said that the U.S. central bank continues to demonstrate its commitment to a whatever-it-takes approach to keep the nation’s economy afloat. As proof, he pointed to the April 30 changes the central bank announced to its Main Street Lending Program. The program, which encourages banks to loan directly to small- and mid-sized corporations, will now also be available to some larger businesses, Ristuben said.

The central bank will also lower the program’s minimum loan requirement from US$1 million to US$500,000, he noted. The Fed will purchase 95% of each bank loan, Ristuben explained.

The central bank’s actions show that it means what it says: there are no limits to how far it will go to help the economy, he stated. “Ultimately, markets appear to be taking some comfort in this, and that’s a positive,” Ristuben concluded.

 

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