Morning Commentary: The Good and the Bad

Foreign Exchange - Morning Commentary
The Good and the Bad
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Over the past month, economic data has exceeded expectations as the Bloomberg US surprise index moved up to its highest levels since early 2008.  Many analysts had penciled in strong numbers as markets expected momentum from the initial reopening bounce to continue but the data still found a way to impress.  For example, core retail sales improved 1.4% MoM in July with June’s number revised up to 6.0% from 5.6% and bringing total spending to higher than pre-pandemic levels.

Unfortunately, where there is good news, there is also bad.  This past week, the Senate tried to pass a skinny stimulus package that addressed the most pressing needs, such as state and local aid and unemployment insurance but lacked the votes to do so.  As evidenced by previous stimulus packages, bipartisan support is needed to pass stimulus, but partisanship is only growing as the presidential election nears.  Because of this, it has become increasingly like that there will not be any additional fiscal stimulus this year. 

This is a key observation as a large part of the economic recovery is owed to the generous stimulus policies that have begun to fade.  As these tailwinds dissipate, the first order impact should be to the purchasing power of the unemployed population.  The CARES act injected a huge amount of money into the household sector through enhanced unemployment insurance and stimulus checks.  It has been estimated that 76% of people eligible for unemployment insurance (UI) received at least 100% of lost wages from April through July. 

The decline in UI should lead to a drop in spending, but the timing and degree of this is a function of the savings rate.  The savings rate, as of July, is around 17.8%.  This is down from the peak of 33.7% in April but significantly above pre-pandemic levels of ~8.0%.  Households should be able to draw from these savings to support spending, but it’s not a straightforward proposition as savings are not evenly distributed. 

Lower income households tend to spend more than they save, leaving savings concentrated amongst high income households.  Additionally, savings may have picked up for these higher income households unintentionally as they were unable to consume services such as dining and travel that continue to be restricted; that’s what makes this week’s August retail sales number especially noteworthy.  It is reasonable to see a softening in consumer spending and August’s retail sales number should provide the first indication of whether this is happening and to what extent.
  • The UK’s Internal Markets Bill continues to be debated in Parliament.  For now, there isn’t much incremental new news, but uncertainty around the bill remains high.  On net, the markets are seeing the bill as saber-rattling for now, but it is unclear how far the UK will actually take it.  Several notable figures in PM Johnson’s own party have expressed opposition to the bill as well as House Speaker Pelosi who stated a US-UK trade deal wouldn’t be possible with the Internal Markets Bill.  Even if the bill isn’t enacted, simply the fact that the UK is discussing not respecting international law risks poisoning already difficult Brexit talks. 
  • Eurozone Industrial Production came in slightly weaker than expected at 4.1% against market expectations for a 4.2% print.  Weakness in France and Germany was offset by strength in Italy and Spain. 
  • ECB officials continue to discuss euro strength with Rehn and de Guindos touching on the exchange rate over the weekend.  Chief Economist Lane speaks again today.  Overall, the path of EURUSD higher remains intact. 
  • Chief Cabinet Secretary Yoshihide Suga won the LDP’s leadership election and is set to be Japan’s next PM.  Suga’s election signals a continuation of PM Abe’s policies.  The risk remains for the LDP to call early elections to legitimize the new PM. 
  • Israel reimposed a national lockdown due to rising infections and deaths.  This is the first such move in response to a “second wave.”  The view remains that most countries will continue to respond with more targeted shutdowns to deal with virus flare-ups. 
  • OPEC has cut its global demand forecasts for each quarter to the end of 2021 as it joins the chorus of those warning about the deteriorating outlook.
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