As many countries start to emerge from economic and social lockdown, we are beginning to see just how much the world has changed over the last two months. Economic data is being released thick and fast, mostly telling us what we suspected – that the global economy has taken a massive hit.
Two sets of data released over the last few days have stood out for me. Last Friday the United States released the employment survey. The Non-Farm payroll report is usually released at 8.30 am ECT on the first Friday of the month and is the subject of many an office sweepstake – the margin of victory being around 5,000 jobs one way or the other. In recent months this report has shown an increase in US payrolls of around 200,000 per month. The unemployment rate is also released at the same time and in February this was recorded at 3.5% of the workforce. Last Friday, the Non-Farm payroll for the month of April fell by in excess of 20 million jobs and the unemployment rate rose to just under 15%. These are unprecedented, extraordinary numbers and best seen visually (see graph below). This is far worse than sustained in the Financial Crisis over a decade ago.
This is temporary and we would expect some reversal in the months to come as the US economy reopens, but some economists are expecting the unemployment rate to remain over 10% for at least the next 3-6 months, which is alarming.
The other piece of data released earlier this week that caught my eye was monthly inflation. Inflation rates had been expected to fall as a large part of the variability of the inflation rate is related to movements in oil prices. Oil prices have been very weak as demand has fallen, so it was no surprise to see prices decrease in the sectors that have oil as a key component (i.e. transport etc.), but what was more eye-catching was the weakness in other sectors of the economy. This led to core inflation rates (i.e. excluding food and energy components) recording their biggest monthly fall on record with the year-on-year rate falling to 1.4% – something not seen since 2011 in the aftermath of the Financial Crisis. The sheer size and speed of the demand-shock related to economic and social lockdown has led to a fall in the market clearing price level for many goods. Unless demand rebounds equally as quickly (which we don’t expect) low prices are set to remain and we should expect similar falls in inflation rates across the world.
These two pieces of data encapsulate for me the reason why investors in US government debt should not feel too concerned about losses despite the low level of yield available (albeit much higher yield than other quality government bond markets). Unemployment tells us why the US FOMC will not be raising rates in a hurry and may look at further easing of policy. Inflation tells us why the future value of the cash flow from fixed income will not be eroded away in real terms.