In the US, Phase 4 stimulus is proving to be much more difficult to get through Congress than the prior three phases, as expected. The Democrats have put forth a HEROES bill worth ~$3.4 trillion while the Republicans have submitted their HEALS bill worth ~$1.1 trillion. These two bills are summarized in the table below from the Center for Responsible Federal Budget (CRFB). As the graph illustrates, the key differences extend beyond the dollar amounts as there are critical disagreements on how funds are to be used. Ultimately, the expectation is for a final bill larger than the HEALS act but significantly less than the HEROES bill.
The main point of agreement between the two sides is on stimulus checks. However, the HEROES act includes $1,200/dependent for up to 3 dependents while the HEALS act proposes $500/dependent for all dependents. Should Phase 4 be passed in early August, these support checks should be rolled out fairly quickly with funds starting to arrive in late August with the largest check coming in early September.
In terms of disagreements, the two key areas are unemployment benefits and state and local aid. The CARES act added a supplemental $600/week payment to unemployment insurance and extended coverage to self-employed and gig workers. For perspective, prior to CARES, the average weekly unemployment insurance payment was $373/week in Q1 2020.
Democrats have proposed extending this program through January while Republicans have called for a two stage program. The first stage will see the supplemental payment decline to $200/week through September with the second stage imposing a formula-based approach where unemployment insurance goes to 70% of income. On the last part, state unemployment offices have indicated that it would be very challenging to put a formula-based system in place. While this is a potential issue, the more pressing concern is the temporary lapse in supplemental unemployment benefits as the CARES act has expired. This could see a decline in income of ~$18 billion/week that will weaken near term spending.
Finally, there are state and local aid differences. The Democratic plan has ~$1 trillion in aid while the Republican program focuses on greater flexibility in the usage of funds already allocated under the CARES act. There are also differences in education funding with the Republican plan tying funding to schools meeting “minimum opening requirements.” Total state and local aid represents a key point as 32 states and DC have revised down their revenue projections for FY2021, illustrating the breadth of support needed. So far, 1.5 million jobs have been cut at the state and local level. Without additional support, further cuts will needed.
Ultimately, a large part of the economy has been supported by stimulus. Data shows that retail spending has returned back to pre-COVID levels while employment has recovered only 1/3 of its losses. This differential is made up by stimulus so what comes next will greatly impact the path of the economy.
The story remains much the same. Europe’s performance on controlling the virus has been better than the US’s. This has shifted market expectations towards euro zone outperformance in Q3 and possibly Q4. Notably, Europe’s ability to agree on the EU recovery fund stands in contrast to the difficulties the US is having with its Phase 4 stimulus negotiations. Cooperation on the rescue fund has reduced euro fragmentation risks and raised the euro as an option for those who want to diversify away from the USD. On the USD side, US-China tensions, rising infection rates and economic underperformance as well as election risks, support the bearish narrative. Absent a catalyst to change the market narrative, the euro should remain supported.
Cable moved up to a 5-month high this past week. To the extent that EURUSD moves higher/overshoots on European economic momentum and USD weakness, cable can continue to move higher. Given this, political risk remains a drag on GBPUSD. Recent Brexit negotiations illustrates how far apart both sides remain with the next round of formal talks not scheduled until August. The current trend for USD weakness/expectations for US economic underperformance should continue to support the GBP but Brexit developments likely caps these gains.
USDJPY is finally breaking out of its recent range to the downside. Notably, the Finance Ministry has started to jawbone the currency as signs of concern with a stronger yen builds. This move to the downside is supported by market risk sentiment around rising infection numbers and signs that the economic re-opening momentum is slowing. On this last point, flux in market sentiment is complicated by both legs of USDJPY being safe haven currencies. Expect the yen to remain in a tug of war between rising COVID/geopolitical tensions and positive economic news/positive vaccine news with a bias for USDJPY lower.
The CAD was one of the worst performers in the G10 against the USD, reflecting the CAD’s unique vulnerability to COVID-19 shocks. Despite all of the various negatives (rising US infections, signs the initial rebound is moderating, US-China tensions), the markets remain focused on a glass half full view which implies further USD weakness. Expect range trading with a bias for strength. However, should risk sentiment turn, the CAD remains more vulnerable than other currencies.
USDCNY continues to hover around both sides of 7.00 on the interbank market. Rhetoric between the US and China continues, but the markets still view recent actions/rhetoric as largely symbolic. This market interpretation and continuing signs of economic performance in China should keep the yuan stable. Expect US-China tensions to remain elevated with the potential to rise as we move closer to the US elections as a “tough on China” view remains supported across the political spectrum. This flags CNY risks over the medium term.
The Aussie continues to rise along with risk markets, but the currency is starting to feel toppish. To this point, the AUD did gain against the USD last week but underperformed relative to European currencies. It should be noted that global economies are transitioning from “easy” growth to a more difficult path as the initial re-opening bounce has passed. The AUD likely remains supported but it’s difficult to get too excited about a move higher given the AUD’s elevated level and rising infection numbers domestically.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.25%
Expectations for rates to remain unchanged at 0.10%
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