Morning Commentary: COVID Comeback

Foreign Exchange - Morning Commentary
COVID Comeback  
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After crashing 6.8% in Q1, China’s YoY GDP number rebounded sharply to a 3.2% YoY increase in Q2.  For what it’s worth in today’s environment, the seasonally adjusted Q2 growth number annualizes out to a 46% pace versus the 40% annualized drop in Q1.  

Of course when discussing Chinese data, it is reasonable to take it all with a grain of salt.  Ever since China started targeting GDP growth, its numbers have somehow managed to come in right at or above the target.  Nevertheless, there is reason to believe that the most recent GDP number is relatively close to reality.  China has stopped formally targeting GDP growth.  This reduces the incentive to pad the number.  Moreover, China’s GDP data is consistent with other data series, such as industrial production and retail sales, which are easier to track.  Industrial production appears to have nearly come all the way back and retail sales has recovered approximately half of its losses.  Other high frequency data points such as electricity use and mobility data also support a sharp recovery in economic activity.  

This is important because China’s recovery has important implications.  A rebound in economic activity is a clear positive for China’s trading partners.  China is particularly important to commodity markets and its recovery has prevented a further deterioration in commodity prices.  The second implication is the importance of an effective virus containment system.  North Asia countries have shown that economic damage is much lower if the virus is suppressed to a manageable level and a robust test, track and targeted shutdown system is in place to manage the virus as the economy re-opens.  

A final implication concerns China’s place in the world order.  Quasi-official shows that China is highlighting how much better it is doing with virus control relative to the US.  China’s relative outperformance appears to have emboldened President Xi to pursue China’s interests in the region and adds to potential geo-political risks in the months ahead. 
  • Treasury Secretary Mnuchin and House Speaker Pelosi are set to start the next round of stimulus talks today.  While these two were able to get previous rounds of stimulus done, the two sides remain far apart on this most recent round.  
  • Canadian retail sales rose 18.7% MoM.  While this number missed market consensus for a 20.0% rise, it did mark a sharp improvement from last month’s -25.0% print. 
  • The EU put the final touches on its EUR750 billion package that consists of EUR390 billion in grants.  Originally, France and Germany wanted this to be EUR500 billion with the frugal four nations looking for EUR350 billion.  The money for this rescue package will come from the EU budget and loans that have to be repaid by 2058. 
  • RBA minutes were released and confirmed that negative rates are “extremely unlikely.”  The government also extended its wage subsidy program another six months but at a lower rate. 
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