Morning Commentary: The Importance of Policy

Foreign Exchange - Morning Commentary
The Importance of Policy
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
One of the fundamental features of free markets is the efficient allocation of the goods and services that society needs, but markets are not perfect; the “tragedy of the commons” concept is an important market failure.   

The tragedy of the commons has been used to explain underinvestment in infrastructure.  If individuals decide how much funding to give to infrastructure, it would be underfunded as individuals would only account for individual benefit and not total societal benefit.  In essence, there is an incentive to “free ride” off everyone else’s contribution.  This is why infrastructure is usually provided by the government.  Of course, there is a justified argument that infrastructure in still inadequate in the US, but that is due to other issues.  

In the COVID-19 era, the tragedy of the commons phenomena takes on increased importance as it likely plays a role in social distancing.  Imposing social distancing comes at a cost to businesses.  To an extent, an individual business does directly benefit but much of the benefit is accrued to society.  By taking precautions, the risk of an outbreak should fall and allow the entire economy should recover faster.  This societal benefit is difficult to internalize for an individual business.  If anything, there is an incentive for businesses to “free ride” and take advantage of a healthier pool of customers should other businesses adopt distancing policies.  

A similar dynamic likely applies to individual decisions.  Social distancing is practiced to protect others more than ourselves in case we are infected and asymptomatic.  Unless people account for other’s wellbeing to the same extent as they do their own, there is a risk that people do not practice enough social distancing to prevent or mitigate future outbreaks.  

These dynamics serve to underscore the importance of public mandates.  Businesses and individuals will do the right thing to a certain extent but a nudge is likely needed to do the right thing for society and the economy.  This is important because future outbreaks aren’t just a public health issue but also a risk factor for a double-dip recession.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Market sentiment is skewing negative to end the week.  European stocks fell on new UK quarantine rules with rising infections and the lack of a stimulus bill in the US also weighing on overall market risk.  The UK has expanded its 14-day quarantine requirement to travels from France, the Netherlands and Malta.  With Germany and Spain seeing rising infections, the risk is for further restrictions that will make re-opening more difficult.  These new restrictions serve as a reminder that all countries, including those who flattened the infection curve, face an uncertain path forward.       
  • Headlines heading into the US-China trade talks are a bit mixed but overall constructive.  On the positive side, news reports indicate that USTR Lighthizer is “satisfied” with China’s commitment to the Phase 1 deal.  Conversely, China issued a warning to the US on its sanctions and tariffs.  Domestically, Chinese economic data disappointed today with industrial production rising less than expected and retail sales contracting more than expected.  This result is significant as it represents the issue facing many countries.  Namely, it is easier to get factories up and running than it is to get consumers to shop.  
  • US retail sales data was also mixed with the headline number missing estimates, but the core number beating.  It should be noted that these retail sales numbers were from July when consumers were still receiving the enhanced $600/week unemployment benefit.  US industrial production met market estimates as it rose 3.0% MoM.    
  • Reserve Bank of Australia Governor Lowe provided dovish testimony to parliament.  The central bank governor stated that he saw the bank’s policy rate at 0.25% for the next three years with a possibility for a cut to 0.10%.  Governor Lowe also expressed a desire for a lower exchange rate but added that he sees the currency as fairly valued and that the bank wouldn’t intervene unless the currency was overvalued.  
  • The Mexican central bank cut rates by 50 bps to 4.50% as expected.
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog