Morning Commentary: COVID-19, the Economy and the Year Ahead: It’s Complicated
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
COVID-19, the Economy and the Year Ahead: It’s Complicated
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Andrew Kositkun Foreign Exchange Head Trader
The relationship between economic engagement and COVID-19 cases has been a complex and ever-evolving one. In the spring, the economy was crushed by surging COVID-19 cases as local authorities initiated broad shutdowns and households sheltered in place. In contrast, the summer virus surge in the U.S. appears to have had a smaller economic impact, as the economy outperformed expectations. What will the winter surge bring?
As with most things, the reality will likely be somewhere between the extremes, although there are reasons to have a bias toward the benign summer scenario. Here are some reasons supporting a more moderate economic impact:
Individuals and politicians have pandemic fatigue, so the bar for hunkering down again is higher.
Fewer federal backstops than in spring and summer could also make local officials more reluctant to shut down again.
People have learned to function with COVID-19, meaning consumers have shifted the way they conduct economic activities rather than stopping them.
However, there are also arguments for why the economic impact could be worse:
Cases, hospitalizations and fatalities are likely to be much higher than in the summer.
The lack of federal backstops means a larger hit to the local economy if businesses are forced to close.
Winter poses two new problems relative to summer. Activities cannot be moved indoors as easily, and unfortunately, holidays can be super-spreader events.
Putting this all together, growth is likely to stall in the next few months, as there are few alternatives to lockdowns absent widespread vaccine distribution. But despite the uncertain environment, expectations for growth (medium-term vaccine optimism) have started to overtake precautions (near-term COVID-19 spikes) as markets have received three straight weeks of positive vaccine news.
The concern is that markets are becoming too optimistic and will have to correct once they reawaken to the cold and difficult reality between now and widespread vaccine distribution. To this point, most global policymakers continue to express caution despite vaccine progress on the positive side of central bank assumptions. Keep in mind that uncertainty remains around the next round of fiscal stimulus in the U.S. and the Thanksgiving holiday is widely anticipated to lead to a fresh COVID-19 spike right around the time of the next holiday period.
Risks aside, over the long run, economies that are best able to deliver higher expected returns to capital should still see currency outperformance. That said, the expected growth differences in 2021 at the aggregate level should be muted, making it worthwhile to look at individual currencies more in depth. We will do this starting next week, but until then, I wish everyone a safe and happy Thanksgiving.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
U.S. initial jobless claims increased for the second week in a row, the first back-to-back increase since July. This back-to-back rise in jobless claims suggests potential weakness in next week’s jobs report, as market consensus is for 500,000 additional jobs versus 638,000 jobs added in October. Unfortunately, with lockdowns widening, the recent run of soft labor market data could just be the start of renewed labor market stress.
The Fed will release minutes from its most recent policy meeting today. While it was an uneventful meeting, the minutes should provide insight into where officials stand regarding QE. The Fed has committed to keeping rates low until inflation hits its target but has yet to provide guidance for balance sheet policy.
Month-end hedging models suggest strong U.S. dollar selling due to strong U.S. equity gains this month.
U.K. Chancellor Rishi Sunak will lay out his plans for next year after promising over the weekend that people “will not see austerity next week” and promising to increase spending to ease the “enormous stress and strain” on the economy.
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