Unprecedented gloom of Mr. Powell will have long-lasting effects

Outlook:

We may have been right that the prospect of another $3 trillion being thrown at the US economy would raise risk-on sentiment and postpone the rush to the dollar as safe haven, but not this time. Mr. Powell’s embrace of the scientists’ deductions about the potential catastrophic economic effects of the pandemic was a surprise to everyone and qualifies as a Shock.

We expected him to refute negative rates and instead we got a prophecy of Doom. As you know, dear Reader, we embrace the doom version of likely events, too, but we never expected the Fed chief to agree and out loud. We cannot recall a Fed chief ever speaking in such a negative way. When Bernanke was Fed chairman in 2008-09, he never spoke of dire consequences; he was making new policy and taking actions to fend off dire consequences, but he didn’t talk about them openly. Yellen and Greenspan were equally smooth-talking, with Greenspan deliberately obscure. 

We get a new jobless claims report this morning, expected at about 2.5 million, “less bad” than nearly 7 million in March but taking the total ever closer to 30-40 million in the end. We may reach 25 million in continuing claims as early as today. The data for the May jobless report is being collected this week, and despite the job-loss process in the works for over two full months, we know the bureaucracies are not keeping up and the undercounting is serious. Goldman sees unemployment at 25%, with a recovery to only 10% by year-end.

Tomorrow brings some of the more important “high frequency” data, including retail sales, industrial production, consumer confidence, even the Empire State index. Some “less bad” data might emerge, but never mind. The die has been cast and we are racing full-speed down the rabbit hole toward massive risk aversion. The benefit goes to the dollar and to gold.

Weirdly, it seems to be going to oil, too, as least so far. Today the International Energy Agency reported the outlook has "improved somewhat" because supplies are falling faster than previously expected. OPEC is slashing output and as the FT reports, shale is faltering in the US as the true leader in reduced supply. But if the world is going to hell, oil should be following. Already we read (Bloomberg) that Norway’s sovereign wealth fund is dumping exposure to fossil fuel companies, inspired by climate control laws, including coal and oil-sand names to the tune of about $3.3 billion. So far. To the degree oil prices are one of the risk proxies, watch out. This is not going to end well.

Today might be roiling waters in FX, but we guess the unprecedented gloom of Mr. Powell will have long-lasting effects and the rush to the safe-havens will persist today. We may be seeing it already in the dollar/yen. 

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