U.S. economy contracts in the first quarter

May 4, 2020 Chatham Financial

Prior week summary

The major U.S. equity indices moved lower on the week, notching a second consecutive week of losses, as weak domestic economic data and rising tensions between the U.S. and China soured investor sentiment despite promising COVID-19 treatment developments and continuing declines in hospitalization rates in U.S. hotspots. Many market participants were encouraged midweek when early data from a study conducted by the National Institute of Allergy and Infectious Diseases (NIAID) suggested that Gilead Science’s antiviral drug, remdesivir, could reduce the time to recovery and increase the survival rate for individuals with severe COVID-19 infections. Speaking on the early results of the study, director of NIAID, Dr. Anthony Fauci, touted the promising data saying the use of remdesivir resulted in, “a clear-cut, significant positive effect in diminishing the time to recovery.” As a result of the early study, the Food and Drug Administration approved the emergency use of remdesivir in the U.S. on Friday. As of Sunday evening, the global infection count has risen to over 3.5 million confirmed cases with the U.S. accounting for approximately 1.2 million confirmed cases, nearly one million more cases than Spain, the world’s second hardest-hit nation by case count. President Trump expressed his displeasure with China’s response to the virus outbreak suggesting that China acted too slowly in both implementing containment measures and alerting international bodies of the disease’s seriousness. The President has suggested that the U.S. will seek reparations from China over their handling of the virus saying that the, “U.S. will bill China at least $160 billion.”

The U.S. economic data releases for the week, while plentiful in number, were largely negative as the economic toll resulting from the spread of the virus and the containment measures implemented to control the spread of the virus continued to show up in the data. The U.S. economy posted the worst quarterly GDP figure since 2008 experiencing a 4.8% annualized decline in the first quarter, far lower than the -3.9% consensus estimate. Analysts warn that while the first-quarter figure was dismal, second-quarter GDP will likely be far worse. The manufacturing sector continued to contract with the latest ISM Manufacturing Index reading at 41.5, above analyst expectations but below March’s 49.1 reading. Jobless claims continued to mount with another 3.84 million individuals filing for unemployment in the last week, bringing the six-week running total to over 30 million people or approximately 18% of the U.S. labor force. The FOMC unanimously decided to leave the target range unchanged at 0% - 0.25% at the conclusion of their two-day policy meeting. In a statement released with the decision, the FOMC warned of the ongoing risks posed by the COVID-19 outbreak and their willingness to support the U.S. economy through the crisis saying, “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” and noted, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The look forward

Market participants are gearing up for another busy week of economic releases with updated figures on the ISM Nonmanufacturing Index, jobless claims, factory orders, and most notably, the April non-farm payroll report, dotting the economic calendar.

Rates snapshot


Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial



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