Morning Commentary: Guiding Nordic Lights

Foreign Exchange - Morning Commentary
Guiding Nordic Lights
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
If increased activity is good for economic performance, then it stands to reason that a pullback in activity, due to voluntary or mandated social distancing, would be bad for the economy.  We now have an academic study to quantify this.

The University of Copenhagen looked at the effect of each kind of social distancing on consumer spending during the COVID-19 pandemic.  It did so by studying consumer spending in Denmark and Sweden, two countries faced with similar outbreaks but adopting very different policy responses. 

The COVID-19 outbreak began at the end of February in Denmark and Sweden with both countries in a similar position as of March 11.  On that day, Denmark imposed strict lockdowns, closed non-essential businesses and limited public transportation.  Conversely, Sweden continued to allow private businesses to operate although it did encourage sick people to stay home. 

Since then, the health outcomes for both countries have diverted significantly.  As of May 18, Denmark had 95 deaths per million people and Sweden had 363 deaths per million people, one of the highest COVID-19 death rates in the world.  Based on this, there is a clear health benefit from lockdowns, but what were the economic costs?
Per this study, consumer spending dropped by 25% in Sweden and 29% in Denmark, making the cost of lockdown policies around 4%.  A 4% drop isn’t a trivial amount but it is a small part of the total decrease in consumer spending.  This indicates that the majority of the slowdown happened due to voluntary distancing measures.   

If the findings from this research paper are applicable to other countries, there could be important implications.  Even with the lifting of official restrictions, it is possible that consumer spending remains highly impaired.  Without a vaccine or an effective treatment, and especially if a second wave appears as expected, it is probable that consumers continue with self-imposed distancing even if official measures are not brought back.      

Ultimately, we are still early in the reopening process and uncertainty remains high.  What we do know is that the University of Copenhagen study showed the virus, not the policy response, was responsible for most of the drop in consumer spending.  If this same dynamic holds true in other countries, then ending official lockdowns is not the end of economic issues.
  • Global COVID-19 cases have topped 5 million with the US accounting for roughly 1/3 of the cases.  Saudi Arabia and other Gulf states have put in restrictions as cases spiked during Ramadan.  Conversely, Japan lifted the state of emergency in Osaka, Kyoto and Hyogo with the possibility of including Tokyo on Monday if the current trend continues. 
  • US-China tensions continue to rise as President Trump accused China of a disinformation and propaganda campaign against the US and Europe.  Additionally, the US Senate passed a bipartisan bill that could bar some Chinese companies from listing in the US.  On China’s part, it ordered Hong Kong to enact its national security law.  This law is opposed by pro-democracy politicians, a group for which the US has expressed support. 
  • US jobless claims came in at 2.44 million against expectations for a 2.4 million print.  However, last week’s number was revised down to 2.69 million from 2.98 million.  Over the last nine weeks, 38.6 million Americans filled jobless claims.  While the weekly number continues to decline on a relative basis, the absolute number still remains historically bad. 
  • BoC Governor Lane expressed the view that 0.25% is the BoC’s lower bound and further cuts were not advisable.  Instead, Gov. Lane put the onus on fiscal policy for further support.  The BoC also raised the possibility of bridge financing for companies needing it due to COVID-19 issues.   
  • US PMIs came in mixed with Manufacturing PMI printing 39.8 and Services PMI printing 36.9.  Market consensus was for a 40.0 and 32.5 print, respectively.  In the absolute, PMI numbers remain very poor.  
  • Eurozone PMIs came in slightly better than expectations but still remain very bad.  Manufacturing PMI came in at 39.5 against expectations for a 38.0 print and Services PMI came in at 28.7 against expectations for a 25.0 print.  On a country level, things were not much better with German Manufacturing PMI coming in at 36.8 against expectations for a 39.4 print.  German Services PMI did beat at 31.4 against expectations for a 26.0 print but, again, 31.4 is a very bad number.
  • The UK reported mixed data.  PMIs came in better than expected with Manufacturing PMI printing 40.6 and Services PMI printing 27.8.  Market consensus was for a 37.2 and 24.0 print, respectively.  Conversely, the Confederation of British Industry reported that May orders came in at -62 versus an expectation for -50.  On the monetary front, BoE officials continue to take a dovish tone with Gov. Bailey admitting his position on negative rates has changed.
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