Apr 27, 2020

Axios Markets

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1 big thing: The next wave of spending...you ain't seen nothing yet

Illustration: Eniola Odetunde/Axios

The Congressional Budget Office estimated Friday that the U.S. budget deficit will be roughly $3.7 trillion for fiscal year 2020, with public debt projected at 101% of GDP — and that was before the "phase four" $484 billion relief package passed by Congress late last week.

  • Already, government spending is far outpacing any previous period in American history and there is no end in sight.

Why it matters: In a world of historically high income inequality and historically low productivity and growth, in which debt levels were already historically high, the U.S. and the world at large are in wholly unprecedented territory.

  • Following World War II, which was the last time the ratio of public borrowing to GDP approached its current depths, the U.S. was able to use the spending on programs that grew the economy and built an unrivaled middle class.
  • There is little expectation that the current debt will lead to a similar outcome.

Driving the news: Following the $2.2 trillion CARES Act and the "phase four" relief package, Congress has signaled there is still much to do, with various "CARES Act 2" proposals in the pipeline.

  • The White House also has made clear it is prepared to back more spending, with President Trump refocusing his efforts "on the economy and a more hopeful, forward-looking message," as Axios' Jonathan Swan reports.
  • Presumptive Democratic presidential nominee Joe Biden has asserted that he favors new economic measures “a hell of a lot bigger” than the CARES Act.

Goldman Sachs researchers in a note Sunday said they expect Congress to approve another $550 billion before the 2020 fiscal year ends in September, plus untold spending on infrastructure, direct payments and unemployment benefits to come in fiscal year 2021.

Between the lines: Already, critics of the government spending have started to emerge from all sides...

  • Some accuse Washington of abandoning ordinary Americans in favor of big business.
  • Some oppose direct cash payments and increased unemployment benefits.
  • Some argue Congress has cravenly dispersed funds to friends and favored industries over the greater good.

The big picture: Economists have warned for years that excessive government spending would crowd out private investment and drive interest rates higher, choking off growth and undermining the economy.

  • Either they are right and we are doomed to prolonged economic misery or they are wrong and a full-scale reappraisal of the modern economic model is underway.
Bonus chart: CBO projects the recession

Data: CBO's projections for calendar year 2020. Table: Axios Visuals

The nonpartisan CBO was the latest to reveal economic projections that throw cold water on hopes for a V-shaped U.S. economic recovery.

  • The agency estimates unemployment will rise to 16% later this year, and hold at more than double its 2019 level through the end of next year. By that time, the labor force will have “about 6 million fewer people,” CBO noted.
  • Growth also is expected to slow significantly, dropping far below levels touched during the 2007–2009 Great Recession.
Double bonus chart: CBO's 2020 and 2021 projections

Data: CBO, BEAU.S. Treasury; Table: Axios Visuals

Given the expected weakness in the economy and drastic increases in federal spending, the CBO projects the U.S. annual deficit will rise to 17.9% of GDP this year, and to 9.8% of GDP in 2021.

  • The previous high for an annual deficit since World War II was 9.9% following the Great Recession.
  • Having risen to around $1 trillion, the deficit was 4.6% in 2019.
2. Catch up quick

Chinese central bank governor Yi Gang wrote in an article that the impact from the coronavirus on China's economy will be short-lived, and warned that "too aggressive" stimulus measures may bring inflation risks and cause too rapid an increase in leverage. (Bloomberg)

The Bank of Japan held a one-day meeting and said it will shift to unlimited purchases of Japanese government bonds and increased yearly buys of corporate bonds and commercial paper. (Bloomberg)

3. U.S. rift with China has tech on edge

Illustration: Sarah Grillo/Axios

Axios' Kyle Daly writes: As Google, Facebook, Apple, Amazon and Microsoft all report their first set of pandemic-affected earnings this week, the industry will get a clearer fix on just how much pain the falling-out between the U.S. and China will inflict.

The big picture: For decades, tech's leaders have bet big on China as a manufacturing hub, supply chain provider and, increasingly, a lucrative market — but trade frictions, national-security tensions, and now coronavirus blame games are imperiling that partnership.

Why it matters: If the "great decoupling" that was already underway pre-virus gets accelerated by the crisis, tech is bound to get caught in the middle.

Commercial exports: The U.S. remains the global powerhouse in semiconductors, home to giants including Intel and Qualcomm.

  • Losing China as a market would hobble these companies' businesses and could push China to further ramp up its own nascent chip industry.
  • Chipmakers already warned that they'd suffer from the Trump administration's actions against Huawei last year and were instrumental in getting carveouts that let some of them continue doing business with the Chinese telecom giant.

Exploring Chinese consumer markets: China has been a key growth region for some U.S. companies, like Apple.

  • But many others, including Facebook, Google, and Amazon, have been largely cut out of the market — or have chosen to not accept the government's rules there.
  • Yet most U.S. firms still dream of access to China's massive middle class market, and a definitive cut-off would put a big cap on their global growth prospects.

"The basic question for the U.S. in dealing with the China relationship is whether the American state can govern," said Matt Stoller, a China critic and research director at the American Economic Liberties Project.

  • "That's really the only question, because right now Wall Street and multinationals don't want that break with China."

Read more

4. Perhaps the worst economic downturn in centuries

Data: Investing.com; Chart: Naema Ahmed/Axios

After seeing IHS Markit's readings on the depths of the decline in Britain's manufacturing and services sectors, Bank of England governor Gertjan Vlieghe warned that the U.K. may be in the grips of an economic contraction for the ages.

  • “Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the U.K., it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries,” Vlieghe said in a speech.

Driving the news: IHS Markit said Thursday that its U.K. composite purchasing managers index (PMI), which tracks both services and manufacturing, fell to 12.9 in April, down from 36 in March, which was the previous record low since the survey began in the 1990s.

  • The eurozone faced a similar reading, falling to 13.5 for the month. Neither the U.K. nor eurozone had ever seen a reading below 35 before.
5. More bleak days ahead for oil

Data: Baker Hughes; Chart: Axios Visuals

In just a few months, the coronavirus pandemic has destroyed so much fuel demand it has created a world in which there is a glut of oil with nowhere to put it, my former boss David Gaffen writes for Reuters.

Why it matters: "While the unusual circumstance of negative oil prices may not be repeated, many in the industry say it is a harbinger for more bleak days ahead, and that years of overinvestment will not correct in a period of weeks or even months."

What's happening: The combination of years of oversupply and plunging demand means oil wells are filling up quickly.

  • In Russia, talks have begun to to burn its oil to take it off the market, sources tell Reuters.
  • Energy research company Kpler said onshore storage worldwide is now roughly 85% full, as of Thursday, and the International Energy Agency estimated demand will fall by 29 million barrels per day this month.
  • IEA predicts consumption will pick up in May, but researchers caution that its expectation of a 12 million barrel per day fall in year-over-year demand may be too optimistic.

What they're saying: “What happened in the futures contract the other day indicated things are starting to get bad earlier than expected,” Frederick Lawrence, VP of economics and international affairs at the Independent Petroleum Association of America, tells Reuters.

  • “People are getting notices from pipeline companies that say they can’t take their crude anymore. That means you’re shutting down the well yesterday.”

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Quote: “I know where I’m going and I know the truth, and I don’t have to be what you want me to be. I’m free to be what I want.”

Why it matters: Today is the fourth day of the Islamic holy month of Ramadan and for the next few weeks I'll be spotlighting quotes from extraordinary Muslims throughout history. Today's quote comes from boxing legend and civil rights icon Muhammad Ali aka "The Greatest."