The Week Ahead – Yes, We're Open

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Like many Americans, I will be heading back to the office starting next week. While working from home has some advantages, I am definitely looking forward to getting back to my normal routine. Of course, it will not be completely the way it was pre-COVID. Employees will be wearing masks and practicing social distancing while in the office. With daily coronavirus infection rates falling to their lowest levels in two months, it certainly makes sense to start lifting restrictions. In many parts of the country, more and more people are getting out. One key metric that shows the increase in activity is the Apple Mobility Index, which shows how many people are using their phones to search for destinations. This index bottomed in March, but has now doubled off the lows and is almost back to the level set in February.

American businesses are re-opening and hiring. The latest jobs report showed that after two months of steep losses, the labor market defied all expectations by adding more than 2.5 million jobs reflecting a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus. This was a stunning development as most (if not all) market participants were anticipating job losses to exceed 7 million. While it is clearly good news, the U.S. labor market will need to add at least another 19 million jobs before it recovers fully.

Clearly, the stock market has been quick to re-rate higher on the back of recent positive events. Not only has the re-opening been happening at an accelerated pace, but the massive amount of economic stimulus keeps coming:

• European Central Bank is expected to announce another $2T stimulus package
• Japan added another $1T in fiscal stimulus
• The U.S. is expected to pass another $1T in relief
• China is spending $1T to bolster its technology sector

We also need to keep in mind, interest rate cuts take 12-18 months to filter through the economy. The U.S. began cutting rates last summer; therefore, the full effect of the hundreds of simulative policy changes have yet to be felt. This unprecedented amount of stimulus continues to bode well for risk assets.

Federal Reserve policy makers will meet this week, with Fed Chairman Jerome Powell holding a press conference on Wednesday. The Fed is also expected to release its first economic forecast since the pandemic forced the economy to shut down in March. In its April policy statement, the Fed said it would hold interest rates at zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Markets are anticipating the Fed will hold rates steady for their forecast horizon, which goes through next March.

The Fed with their swift and bold response deserves a lot of credit for the rapid recovery of the markets and handling of the financial crisis. It will be highly interesting to hear their most recent assessment of the economy.

Data deck for June 8–June 12: