Weekly Market Insight

Latest Economic & Market Update 8th May 2020

08th May 2020

Latest Economic & Market Update: Consumer spending, the driving force of the economy | Unemployment claims in US reach 33 million

Latest Economic & Market Update
Good Afternoon, it is 8th May 2020 and here is your economic and market update from BlackBee
Today we are going to focus on:
> Consumer spending, the driving force of the economy.
> Moody’s to release update on creditworthiness of Italian debt.
> Unemployment claims in US reach 33 million.
> BOE forecast worst recession since the ‘Great Frost’.
Graph of the week: Consumer spending is the driving force of the economy
Without demand, businesses fail and the economy sinks into a recession. The personal savings rate in the US jumped from 8% in February to 13.1% in March. Over $2.1 trillion was put into savings, the highest amount since 1981. Prior to the crisis, the US was in the longest economic expansion in history. The savings rate gradually increased during this period as there was an expectation of an impending recession. The sharp increase in the savings rate for March is influenced by fear and uncertainty over job security. US retail sales saw the largest drop on record since 1992 falling by -8.4% in March. Accompanying these sharp changes was the mass increase in the numbers applying for unemployment benefits, a figure that reached over 33 million people last week. The figures for March shown in the above graph are forecasted to depict a worse picture for the economy in April as retail sales are expected to decline further accompanied by another increase in the personal savings rate. Although the drop in retail sales can be attributed to lockdown, the lockdown was not fully in place until April and hopes of a recovery in retail sales will be restricted by the phased reopening of the economy. Not all of those who lost their jobs will get their jobs back on reopening of the economy, again limiting consumer spending. Consumer spending, the driving force of the economy, will be a gradual recovery over time.
Tech stocks continued their rally on Thursday, pushing the YTD return on the Nasdaq up to +0.08%. Ratings agency Moody’s is set to release an update on the creditworthiness of Italy on Friday. Standard & Poor’s and Fitch have already released updates, with Fitch downgrading Italy’s debt to one notch above “junk” bond status. If Moody’s decide to downgrade Italy’s debt to “Junk” status, they will be the first to do so. The main issue for Rome is how Moody’s view the increasing debt the country is taking on to weather the crisis. If a downgrade occurs, we will see a shift from private to public holders for Italian debt, as pension funds and insurance companies will have to sell their positions. The figure for Americans applying for unemployment benefits has risen to over 33 million, with a further 3.2 million applied for benefits last week. Despite the figures still being record numbers, it appears that the number applying for benefits is stabilising, though these figures remain the worst reading since the great depression. A backlog in applications could have also previously understated the true number of Americans applying in recent weeks. Although a rise in employment is expected once the economy reopens, time will tell if the same jobs are there to stay as there remains the possibility that businesses will not survive. Rental strikes are expected in the US as households can no longer afford rent. Rental figures for April only showed a -4.1% decline yoy, however, the economy was only beginning to shut down when rent was due. There is already a temporary ban on evictions in the US and there are now talks on the possibility of cutting rent for the remainder of the crisis. The decision to completely cut rent could have severe knock-on effects as landlords also have overheads and will not be able to pay lenders who in turn will not be able to pay investors. The Bank of England has warned of the worst recession in 300 years as it forecasts output to drop by over 30% for the first half of the year. The recession forecast by the Bank of England would be the fastest and deepest recession since 1709, the year of the ‘Great Frost’. The Great Frost saw Europe freeze overnight, far beyond normal levels of cold snaps, and remain frozen over for three months resulting in food shortages and a huge number of deaths. The Bank of England also decided on no new stimulus despite the forecast and encouraged banks to keep lending to keep economic activity levels up and help the economy recover faster. The policy decisions are a sharp contrast from the financial crisis where lending was restricted. The Governor of the Bank of England was subject to heavy criticism as despite such grim forecasts, he expected a V-shaped recovery. Household consumption fell by over 30% since the lockdown began and damage to the economy is expected to be much more persistent than the expectations of the governor of the Bank of England.
Best & Worst Performers of Large Cap Stocks on Thursday
Click the image to enlarge
General Market Update