Morning Commentary: The Cost of Gridlock

Foreign Exchange - Morning Commentary
The Cost of Gridlock
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Yesterday, US equities finished higher and have opened positive today on the back of positive headlines on fiscal stimulus.  While yesterday’s negotiations didn’t result in an agreement, it yielded enough progress for the Democrats to delay their vote and extend talks another day.  With both sides stuck due to pre-election posturing, reaching a compromise becomes increasingly difficult the closer we get to Election Day.  This raises the question of how long fiscal stimulus from the spring will continue to support growth before it fades.  

In an effort to do this, we turn to a model created by the Brookings Institute that attempts to estimate the impact of fiscal policy on GDP growth from the federal, state and local levels as well as automatic stabilizers.  The impact of fiscal policy comes on growth through both the “multiplier effect” of each spending action and the lags.  Additionally, the model depends on spending assumptions.  For example, the model assumes consumers spend 90% of unemployment benefits but uses a lower propensity to consumer for other programs.  This makes sense as a lot of stimulus funds went to households in less distress.  

In total, the Brookings Institute estimates that stimulus offset 1/3 of the shock to the economy.  Unfortunately, stimulus is rapidly fading and is expected to turn negative by the end of Q1 of next year.  Between now and then, the economic recovery should continue to improve, but this overall growth does makes some ugly undercurrents.  For example, some people who received PPP payments and stimulus checks were not under stress, leading to more spending than normal.  Additionally, not all businesses that were able to survive due to PPP funds will be able to continue without further help.  

The last recession provides a good example of the dangers of policy gridlock for an economy coming out of a major recession.  During the last recession, the economy received a huge fiscal boost through the $831 billion American Recovery and Reinvestment Act of 2009.  But this proved to be the only stimulus package as Democrats lost control of the House, freezing discretionary spending.  From 2010 to 2015, fiscal policy was actually a headwind to GDP growth and resulted in a slow recovery with low inflation and sustained super easy Fed policy.  

This is a relevant lesson as polls suggest Washington DC gridlock as a possible outcome this election cycle.  Senate Republicans are already pushing back on further deficit spending ahead of the election and with a Republican President pushing for a stimulus package.  After the election, and especially if there is a Democrat in the White House, this opposition is likely to grow and risks a repeat of the slow recovery seen last time around.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • US initial jobless claims came in at 837K which beat estimates for an 850K print.  While this week’s claims number represents an improvement over last week’s revised 873K number, initial jobless claims remain significantly higher than where it was pre-pandemic.  Adding additional pressure to the labor markets going forward are the furlough announcements from a variety of industries including two major US airlines.  The CARES act provided support to airlines under the condition of no layoffs or pay cuts before October 1.  With no new stimulus in place yet and passenger traffic back to only 1/3 of pre-pandemic levels, airlines have been forced to take action.  To this point, airlines indicated they would reverse course if the government agreed to additional support in the coming days.   
  • Initial optimism around Brexit talks have begun to fade as reports indicate the EU is preparing to send the UK a “letter of formal notice” for breaching the Withdrawal Agreement that could set up for a potential lawsuit.  
  • Japan’s Tankan index came in weaker than expected at -27 versus expectations for a -24 print.  It’s worth noting that the reading out of small businesses is significantly worse than out of larger ones.  
  • The Tokyo Stock Exchange, which is the world’s third largest exchange, halted trading for the entire session due to a technological glitch.  Trading is expected to resume as normal tomorrow.
  • Q3 2020 was the worst third quarter on record for large corporate bankruptcies.  US filing show that 70 companies with more than $50 million in liabilities filed for bankruptcy protection.  Retail and energy made up a significant portion of these filings.
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

Are tax hikes coming?