The US’ record-long economic expansion came to an end in the first quarter as the advanced reading showed a -4.8% contraction; weaker than the -4% economist consensus. With this being a preliminary reading, it is still subject to further revisions, which could show that the economy actually shrank further as the true economic impact of Covid-19 is realised. Moreover, the second quarter readings are expected to be far worse.
Having stayed pat on rates, the Fed said it will hold rates at 0%-0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its” employment and inflation goals, particularly as the outlook is “shrouded in uncertainty”. Warning of the “medium term” economic fallout, the central bank pledged to support the economy “forcefully, proactively and aggressively” through the use of a “full range of tools”. Fed Chair Powell said “direct fiscal support” may be required to “limit long-lasting damage”, adding that it was time to utilise “the great fiscal power of the United States”. So far, the Fed has purchased ~USD2tn worth of USTs and mortgage-backed securities. Over the past couple of months it has announced an additional nine lending programmes to the tune of USD 2tn to further support financial markets, taking the central bank’s balance sheet to an astonishing USD 6.6tn, from USD 4.2tn just two months ago.
The growth picture in the EU painted a similar picture with the Q1’20 flash reading showing a 3.8% contraction; the worst reading since records began in 1995. Today’s Super Thursday data dump from the EU shows that France’s GDP could have shrunk by as much as -5.8% (vs -4% estimates), while Spain could see its biggest quarterly decline since the 70s (when official records began), estimated at -5.2%. Italy’s growth reading actually surprised to the upside at -4.7%, versus expectation for a -5.4% slump. This reading does suggest the Italian economy is in technical recession following the -0.3% Q4’19 contraction.
It’s pretty clear that the global economic picture for this half of the year will be dire, however, there are hopes that as Covid-19 cases appear to be slowing many countries are looking to kick-start their economies and H2’20 may show some signs of recovery. There are concerns, however, that high levels of unemployment and benign inflation will lend little support to central banks, who broadly have very limited monetary ammunition, coupled with ever expanding government balance sheets. We therefore continue to favour high-rated sovereign and quasi-sovereign holdings from ‘wealthy’ nations which offer attractive risk-adjusted returns and sufficient credit notch cushions.