Morning Commentary: The Blame Game

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

The Blame Game Share this story: Andrew Kositkun Foreign Exchange Head Trader

As of this morning, the outlook for the US’s Phase 4 stimulus package looks bleak with both sides saying they are “very far apart.”  The Republicans are looking for a self-described “skinny deal” of ~$1 trillion while Democrats have proposed a plan in the $3.4 trillion range.  If the dollar amount was the only issue, it would be much easier to reach a deal.  Unfortunately, wide gaps over the structure of the program, including unemployment insurance and state and local aid, exist.  With these issues falling on different side of the political spectrum during an election year, the risk is gridlock until there is major outside pressure from equity market weakness or economic softness.   Signs of this outside pressure are starting to show.  The supplemental unemployment benefit was one of the most contentious parts of the stimulus package.  Ultimately, supplemental unemployment was designed to replace income during the shutdown with the assumption that the economic recovery would be a quick one.  Instead, the recovery has stalled with only ~40% of job losses reversed.  This puts the US economy at risk of falling off a fiscal cliff.   This cliff edge is illustrated by daily Treasury statements that show a dramatic drop in benefit payouts.  Due to the lumpy nature of benefit payments— Monday and Tuesday are 35% higher than average, Wednesday is 10% higher than average, and Thursday and Friday both ~45% below average — the data needs to be adjusted.  After this adjustment, we are able to see that daily payments dropped from $5.6 billion per work day at the end of July to $2.9 billion at the beginning of August.  This is a material number.  Recipients of unemployment typically spend all of their benefits.  Assuming this, $13.5 billion/week accounts for roughly 5.4% of all weekly consumer spending.  Clearly, the negative shock to the economy only grows the longer Washington remains deadlocked.  Should job losses also be thrown in the mix, the economic damage would be compounded and certainly change the tone in Washington if a deal still hasn’t been reached. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Equity markets around the world are broadly higher despite a growing list of negatives as markets remain desensitized to negative drivers.  On the virus front, worldwide numbers continue to rise with cases picking up in some European countries and several other countries showing concerning data.  In the US, overall infection numbers remain high but hospitalizations and mortality rates in some of the most affected US states are improving.   Russia claims it has won the vaccine race with one of President Putin daughters reportedly vaccinated.  All of this needs to be taken with a great deal of caution as researchers have not published any data and their sample size is just a few dozen people.  President Trump has raised the possibility of cutting capital gain taxes.   Congress is needed to lower the capital gains rate, however Trump’s aides have indicated that he can index capital gains with inflation, which would lower the effective rate.  Should the president take the executive order route, it would most likely face legal challenges.  As with action on payroll taxes, reducing capital gain taxes does little to nothing to help the millions of unemployed.    US Phase 4 stimulus talks remain stalled with several areas of disagreement including state and local government aid, unemployment benefits and liability protection in focus.   The US risks isolating itself at the UN on the resolution to make permanent a ban on arms deals with Iran.  Allies like Germany and France are likely to vote with Russia and China in the Security Council during the vote that could be held today.  Should the US fail to get the 9 required votes, it could be forced to use its veto.   US yields (2 and 10 year) are currently up on the session as markets pull back on its expectation for negative rates by the end of 2021.  However, market pricing does indicated expectations for a move into negative territory during the first half of 2022.    The UK’s labor market data was mixed.  The unemployment rate beat expectations at 3.9% but jobless claims rose 94.4K after falling a revised -68.5K last month.  It should be noted that the government’s furlough program adds noise to these numbers relative to the true figure.   Germany’s ZEW survey was mixed with the current situation missing expectations but future expectations beating market consensus.

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