Morning Commentary: It Takes Two to Tango

Foreign Exchange - Morning Commentary
It Takes Two to Tango
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The US Senate is scheduled to go on recess today for the rest of the month, leaving the Phase 4 stimulus talks at an impasse.  As a result of Congress’s inability to make progress, President Trump issued a series of executive orders intended to bypass the legislative process and stimulate the economy.  A summary of Trump’s recent executive orders is below.
  • Unemployment insurance: $400 in benefits with 75% of funding from the disaster relief fund and 25% from states.  Subsequent to the executive order, reports indicate this amount might be $300.  
  • Payroll taxes: the employee portion of the social security tax is deferred from Sept. 1 to Dec. 31 for those making less than $104K/year.  Currently all deferred taxes would be due at year end.  
  • Assistance for renters and homeowners: directs funds to assist renters and homeowners facing foreclosures and evictions.  
  • Student loan deferrals: continues a policy in the CARES Act through Dec. 31.
The key question now is whether or not these executive actions will mitigate the fiscal cliff off of which the US has fallen.

Regarding unemployment insurance, the order, in theory, does offset a big part of the lost benefit.  But in practice, it takes a long time to set up a new program and state funding will be difficult to find.  Likely it will have to come from other programs and lead to a rob Peter to pay Paul scenario.  A similar challenge exists with the renter and homeowner program.  It is a noble cause, but where does funding come from? 

The payroll tax program also faces many challenges including some legal questions.  A huge deferred liability will build as companies stop withholding social security taxes.  What happens if that employee leaves the company?  Deferring student loans does help some, but the numbers are small.  

An argument has been made that the executive orders will put pressure on Democrats to compromise and strike a comprehensive deal.  But this is far from certain as both sides have adopted a wait and see strategy.  Republicans are hoping adequate stimulus is in place while Democrats are hoping the orders do not adequately boost the economy, pulling Republicans back to the negotiating table.  With the Senate gone for the rest of the month, any deal is unlikely until mid-September at the earliest.    

Looking ahead, the view remains that it will likely take some outside force (popular pressure, economic or equity weakness) to motivate action.  To this end, keep an eye on high frequency indicators such as retail sales.  
  • US initial jobless claims dropped below 1 million for the first time since the pandemic started with this week’s number dropping -228K to 963K.  Continuing claims also dropped to 15.5 million, beating expectations but remaining historically high.   
  • The S&P 500 index sits around record highs after completing its 175-day peak to trough to peak trip.  The S&P 500 index’s performance compares favorably to stock indexes around the world and especially with Europe’s EuroStoxx 600 that is still down -10.2% YTD.
  • The US Trade Representative’s office modified its EU tariff list related to the Boeing-Airbus dispute.  The new list is now more concentrated on goods from Germany and France.  Notably, the US did not widen the list to increase the total or raise tariff levels to 100% as threatened.  For the EU’s part, it said the lack of escalation could lead to more cooperative agreement.  The EU is waiting on a WTO decision on its own claims against Boeing that could allow it to take similar retaliatory actions against the US.    
  • Australian jobs data beat market expectations with the country adding 114.7k jobs against expectations for 30.0k additional jobs.  More than 40% of the jobs lost have now been recovered.  While this is positive news, it should be noted that the vast majority of jobs recovered has been part-time (67% this month and 100% in June).  Further, the jobs data does not capture the impact of renewed lockdowns.
  • The Bank of Mexico is scheduled to deliver its latest rate decision today.  Market consensus is for the bank to cut rates by 50 bps to 4.50%.
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