BMO: The US Recession Is About As Subtle As A Network Outage At Netflix

Authored by BMO Capital Markets rates strategists Ian Lyngen, Ben Jeffery, and Jon Hill

It’s an optimistic start to the week in decidedly pessimistic times. With chatter that Spain and Italy may have crossed the Covid-19 apex and a slowing of US fatalities, global risk assets have outperformed overnight and Treasury yields increased. It’s a holiday shorted week with limited data of note except for the March CPI release; this is, however, a uniquely non-tradable event given it prints on April 10 when the market is closed for Good Friday. It’s not inconceivable that it would be brought forward, but as it currently stands odds favor an ignorable report – if for no other reason than the drop in energy prices will impact the headline figure to such a degree as to undermine its relevance in influencing medium-term inflation expectations. March data has taken on a dismissible character given the distortions created by the coronavirus.

US rates has lost all correlation with economic data. The number of releases which would have warranted massive repricing, but instead have been largely ignored by investors is lengthy – and surprising insofar as they have primarily been related to the labor market. It follows intuitively that the ISM series, durables, housing data, etc. would be dismissed as irrelevant in assessing the economic damage from the pandemic; employment on the other hand will prove to be the beginning (and eventual end) of the recession which is surely upon us.

At the beginning of 2020 we highlighted the risk that the US would slip into a recession so subtly that investors might be caught unaware until after the fact; couldn’t have been wronger (it really should be a word). Not only is it blatantly obvious the recession is nigh; but it’s about as subtle as a network outage at Netflix. We physically shudder at the thought. This has altered the timeline of trading the hit to the domestic economy and the path of rates going forward – as well as led to a collective disinterest in the incoming data.

We’ve been on about how economic reports are in the process of being defined in three stages: pre-virus, mid-virus, and post-virus. This logic continues to hold; although we’ll add another nuance – as we’ve seen investors willing to use the pandemic’s path in Europe as a guide for US expectations, so will be the case for any eventual recovery.

Of course, this will not be one-for-one as the structures and risks on the Continent differ significantly from those in the US – to state the obvious. Nonetheless, in the coming weeks/months it is reasonable to assume the market will be anxiously watching the depths of the European recession for guidance on the magnitude of what to anticipate domestically. This will function with a discount of applicability – but still prove the next phase in trading the pandemic. This presupposes the transition from apex to reopening is forthcoming as the realities of the shutdown remain close at hand.

The day ahead holds remarkably little to occupy investors in terms of incoming information; there is a 3-year auction which promises to gauge the market’s appetite for new Treasury notes in the present environment. Our expectation is for the event to come and go, leaving no discernable impact on the outright level of yields or sentiment. As the largest 3-year offering since April 2010 and the backdrop of a Fed actively monetizing the deficit, we’re reminded that March’s comparable issuance tailed 2.9 bp. In an homage to Bobby Zimmerman’s newest release; Rub a Dub Dub, An Auction so Foul. Hats off not only for the artist still recording at 78, but also for offering an anthem for a pandemic.