Risk Drivers from Bloomberg:
Faith in central banks is a powerful force paving a path forward for equities. But risk assets may test just how far whatever it takes guidance can go as warnings of ongoing dismal data shake hopes for a consumer-driven snapback.
• Painful path ahead. Heavy job losses in leisure, retail and hospitality, accounting for ~20% of the U.S. workforce, will struggle to bounce back upon re-openings. The risk is temporary losses will persist for longer than extra benefits will last, with most set to expire by July 31
• Unemployment woes. The April surge in unemployment already underestimates the extent of damage with the participation rate falling to a 47-year low. Almost 10 million Americans would like to work, but stopped looking, with scarring effects
• Delinquencies. Consumer filings tend to rise for several months after the unemployment rate peaks. Modeling suggests the household loan delinquency rate will jump more than 5ppts, approaching levels seen post-2008/09
• Financial distress. U.S.households in aggregate have debt servicing costs at just under 8% of disposable income, below the 2007 peak. Yet the bottom 90% of American households based on income account for nearly three quarters of the nation’s debt loads
• Permanent job destruction. U.S. bankruptcies are already on pace to top the number of filings seen in the 2008/09 crisis. A wave of corporate failures will be aggravated by current court backlogs even amid stimulus to curb the extent of insolvencies
• Operating models. Adjustments to how businesses function have yet to be discounted in optimistic earnings forecasts, from ensuring supply chain resiliency to incorporating social distancing practices and altered consumer behavior
There’s little doubt in markets that central banks are the ultimate backstop. Yet restarting the economy won’t be easy -- households with the capacity to unleash pent-up demand on the back of stimulus will be needed alongside the firms that employ them. Until there is certainty that infection rates will steady even as lockdowns are lifted, businesses will survive and consumers will have purchasing power to spend, it is hard to see just how optimism can prevail, even with a powerful monetary backstop.
Faith in central banks is a powerful force paving a path forward for equities. But risk assets may test just how far whatever it takes guidance can go as warnings of ongoing dismal data shake hopes for a consumer-driven snapback.
• Painful path ahead. Heavy job losses in leisure, retail and hospitality, accounting for ~20% of the U.S. workforce, will struggle to bounce back upon re-openings. The risk is temporary losses will persist for longer than extra benefits will last, with most set to expire by July 31
• Unemployment woes. The April surge in unemployment already underestimates the extent of damage with the participation rate falling to a 47-year low. Almost 10 million Americans would like to work, but stopped looking, with scarring effects
• Delinquencies. Consumer filings tend to rise for several months after the unemployment rate peaks. Modeling suggests the household loan delinquency rate will jump more than 5ppts, approaching levels seen post-2008/09
• Financial distress. U.S.households in aggregate have debt servicing costs at just under 8% of disposable income, below the 2007 peak. Yet the bottom 90% of American households based on income account for nearly three quarters of the nation’s debt loads
• Permanent job destruction. U.S. bankruptcies are already on pace to top the number of filings seen in the 2008/09 crisis. A wave of corporate failures will be aggravated by current court backlogs even amid stimulus to curb the extent of insolvencies
• Operating models. Adjustments to how businesses function have yet to be discounted in optimistic earnings forecasts, from ensuring supply chain resiliency to incorporating social distancing practices and altered consumer behavior
There’s little doubt in markets that central banks are the ultimate backstop. Yet restarting the economy won’t be easy -- households with the capacity to unleash pent-up demand on the back of stimulus will be needed alongside the firms that employ them. Until there is certainty that infection rates will steady even as lockdowns are lifted, businesses will survive and consumers will have purchasing power to spend, it is hard to see just how optimism can prevail, even with a powerful monetary backstop.