Morning Commentary: Hot Spots Aren’t Equally Hot

Foreign Exchange - Morning Commentary
Hot Spots Aren’t Equally Hot
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The phased reopening in the US has been met with rising numbers of COVID cases around the country.  Yesterday, the US set a new record high for new infections as the country recorded 39,000 new cases which surpassed the previous April 24 peak. 

While 23 states are seeing an increase in new cases on a 7-day moving average basis, ~50% of these new cases are concentrated in 4 states: California, Texas, Florida and Arizona.  The share of positive tests is also rising in all these states but California. 

Looking deeper into the data, we see that daily new cases per million are rising fastest in Arizona.  Given the state’s skew towards an older population, the fear is that the current outbreak could lead to a rise in fatalities.  In regards to the growth rate in hospitalization, Oklahoma and South Carolina are doing the worst.  Similar to Arizona, both of these states have a higher than average population share of those over 65 years old.  On the positive side, California’s situation might not be as bad as it appears at first glance.  While the number of cases has risen as the numbers of tests have increased materially, the share of positive tests remains flat. 

On the economic front, the overall economic picture continues to improve.  Nevertheless, it is notable that the pace at which small businesses are normalizing has slowed.  This is possibly due to voluntary distancing measures given spikes in infections.  Recent research has shown voluntary social distancing to be a key driver for the fluctuation in consumer spending.  This means that even absent official government measures, states that are experiencing spikes in virus infections can still experience an economic drag.  In essence, the tie between the virus and economic performance will be around for the foreseeable future and adds another reason to track hotspots. 
  • Governors in Texas, North Carolina, Louisiana and Kansas have all halted their re-opening plans amid a spike in cases.  The silvering lining is that the death rate has not moved up in line with infections. 
  • US consumer spending missed consensus but still rose a record 8.2% in May as lockdown restrictions eased.  This month’s positive print follows the sharpest decrease on record last month.  Personal income fell less than expected at -4.2% versus expectations for a -6.0% fall. 
  • Banco de Mexico cut rates by 50 bps to 5.0% yesterday, the lowest level in four years.  The bank also signaled that it will continue to ease as is warranted by the economy.  The bank also acknowledged that the economic impact of the pandemic will be harsher than initially thought.  The next scheduled meeting is August 13, but it is possible that the evolution of economic data could push the bank to act again before then. 
  • Turkey’s central bank kept rates unchanged despite market consensus for a cut with some economists even calling for a 50 bps cut.
  • Equity market volume is expected to surge today as trillions of dollars benchmarked to the S&P and Russell indexes are adjusted to reflect the indexes’ new weightings.  While revision have always been closely watched, they take new meaning in the COVID-19 era as sizeable moves in some areas have made changes more significant than normal.  
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