04 Aug May 15, 2020
U.S. Economic Data
Consumer inflation fell 0.8% in April relative to March, which was down 0.4% relative to February. April retail sales declined 16.4% on top of an 8.7% decline in March. Industrial production dropped 11.2% relative to March, which saw a 5.4% decline relative to February.
Our Take: April was the first full month impacted by the COVID-19 mitigation efforts. As expected, economic activity contracted sharply during the month. Market pricing for risk assets seems to imply that fiscal and monetary policy interventions will blunt the ongoing impact of the pandemic and that there will be a strong and sudden recovery in growth back to previous levels.
Fed
While speaking at a virtual event this week, Fed Chairman Powell discussed the outlook for the economy, noting that the path forward is highly uncertain and subject to downside risks. Of note, the chairman said the Fed is not considering negative rates in response to the economic downturn brought on by the COVID-19 pandemic. He added that the committee’s view on negative rates remains unchanged and highlighted all senior Fed officials agreed that going negative is not an attractive monetary policy.
Our Take: We are truly in unprecedented times and the path forward is unclear. Advocates of negative rates argue that it could boost demand and help spur economic growth. However, there is little evidence of that contention holding true. Fed officials have long doubted the effectiveness of going negative. It is refreshing to note their views have not changed.
China
The Commerce Department issued new rules further restricting Huawei’s access to vital semiconductors. The new rules bar chip manufacturers that use U.S. firms’ production equipment from selling to Huawei. Huawei’s chairman stated that the Chinese government will retaliate against U.S. actions aimed at Huawei.
Our Take: U.S.-China tensions were already rising over blame for the COVID-19 pandemic and China falling short of phase 1 purchase amounts. This latest action will only increase those tensions. A re-escalation of the U.S.-China trade conflict is the last thing the global economy needs during its current downward spiral.
Municipals
Nevada Governor Steve Sisolak declared a fiscal emergency this week and the Nevada legislature followed by declaring a state of fiscal emergency. These declarations allow the state to transfer money from the state’s rainy day fund to the general fund. Estimates show that Nevada’s budget shortfall could reach $911 million.
Our Take: Nevada, along with other states with revenue tied to tourism and gaming continue to struggle. Bloomberg reported that gaming wins were 40% lower in March 2020 compared to March of 2019. By accessing the rainy day fund, Nevada is able to patch its budget. Once states start to reopen, revenue collections will ramp up, but it will be a slow process.
All expressions of opinions are subject to change without notice in reaction to shifting market conditions. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities and should not be relied on as financial advice.