Morning Commentary: Slow Break Transition: What Matters

Foreign Exchange - Morning Commentary
Slow Break Transition: What Matters
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The US economy is in transition.  Previously, the economy was in the V-shaped growth rebound stage where the economy rebounded upon reopening amid considerable stimulus.  It is now transitioning to a much slower growth stage that should be much more stop and go.  In this new stage, which will be defined by the path of the virus, we should learn more about the scars left on the economy as a result of the huge shock from the pandemic.  Further stimulus, both fiscal and monetary, should be on the way but won’t have the same force as the first round.  

The pandemic has fundamentally shifted the drivers of the economy.  As such, traditional economic measures have reduced significance.  An example of this is quarterly GDP data.  Q2 GDP will likely show a sharp decline, but the economy actually started to inflect higher around middle to late April.  This makes the steep Q2 GDP drop more representative of the end of March/early April period rather than the entire period.  

The fast moving nature of change makes high frequency data more useful in gauging what is going on in the economy and distinguishing the signal from the noise.  While there is a wide variety of high frequency data to look at, the three most important categories are mobility, consumer spending and sentiment, and small business activity.
  
Mobility refers to movement in the economy.  Where are people going, how does it vary by region, and how is it impacted by the virus?  Mobility data is important because it has been shown to signal a turning point before activity data does.  

Consumer spending and sentiment matters because the consumer is front and center in the shock.  How households react to the path of the virus will be key to the recovery.   This reaction can be seen through consumer spending and sentiment trends.  The fact thsy Washington D.C. has focused a large part of stimulus on households further highlights its importance.  

Finally, there is small business activity.  This is important because the small business sector is particularly vulnerable and understanding its performance is critical to understanding trends in the economy and the labor market specifically.     

 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Republicans finally unveiled their $1 trillion stimulus plan last night.  Talks between Republicans and Democrats continue today as both sides rush to create an agreement with several parts of the last stimulus law drying up and the August recess just around the corner.  Any way you look at it, expect a drawn out negotiating process.  
  • The Republican proposal cuts the supplemental unemployment benefit from $600/week to $200/week for a two month transition period until states are able to create a system that provides 70% of a worker’s lost wages up to a maximum of  $500/week.  The $200/week number is likely a starting point for negotiations but illustrates the wide gap between the Republican and Democratic plans.  The current $600/week plan technically ends July 31, but states will pay it only through the week ending July 25 or 26 depending on the state.  The issue stems from states paying unemployment with a defined end date of Saturday or Sunday.  The CARES Act authorizes payments “on or before July 31” which is a Friday.      
  • Senator Romney and Collins have signaled that they will vote against Judy Shelton’s nomination to the Fed Board of Governors.  Should two more Republicans vote no, Shelton’s nomination will fail.  Shelton is seen as a controversial pick due to her past comments. Conversely, Waller’s nomination is considered a done deal. 
  • The London School of Economic published a study suggesting that the shock from Brexit will be different from the pandemic.  In essence, Brexit will hit sectors that have not suffered as much from the pandemic and further hinder an already weak economy.  
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