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Winter Weather Cools Vaccine Optimism
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Andrew Kositkun Foreign Exchange Head Trader
COVID-19 infections continue to spread at an exponential rate as the seven-day average of new daily cases rose ~30% to just under 170,000 cases a day. This is more than 3.5 times higher than the September low and well higher than the summer peak. By region, the Midwest continues to see the sharpest surge, but new cases per million have surpassed previous peaks in the South, Northeast and West. The positive rate of tests has also climbed to 9.9%, which is the highest level since May. As growth in new cases has shown little signs of abating, both hospitalizations and deaths should continue to climb, putting further pressure on an already strained hospital system.
Hospital systems across the U.S. are dealing with an influx of COVID-19, as ICU occupancy levels are much more elevated than they were in April. Further, despite recent vaccine optimism, widespread distribution is still many months away. As a result, it should be no surprise that many state governors and local leaders have been forced to impose increasingly strict restrictions to mitigate the spread of the virus.
As more stringent measures are adopted, expect high-frequency indicators of economic activity to reflect this through deteriorating data. To this end, the following activity series have already started to show modest declines:
OpenTable data shows a 7% decrease in seated diners at restaurants in November compared to October.
Google and Dallas Fed mobility measures show less movement in November than October.
Homebase’s database shows a decline in small business employment.
Unfortunately, these trends are likely to continue over the coming weeks as cases continue to climb and more restrictions are put in place to mitigate the spread. Positive vaccine news shows that there is light at the end of the tunnel, but we are still deep in the tunnel during what could be a long winter. This unfortunate fact should result in safe haven demand, providing an offsetting force to the market consensus for U.S. dollar weakness.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
A rift has opened between the Fed and the U.S. Treasury over whether or not to preserve emergency lending programs. In a letter to Fed Chair Jay Powell, U.S. Treasury Secretary Steven Mnuchin sought a 90-day extension for four of the Fed’s emergency lending programs but asked that other programs be allowed to expire as planned on Dec. 31. In response, the Fed issued a statement indicating that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
There are several negative implications of the Fed–Treasury spat, with the key ones being that 1) the Fed and Treasury are not on the same crisis management playbook page and that 2) the disagreement was taken public. There will be disagreements between agencies, but these differences are best discussed and resolved in private so that market confidence in U.S. policymaking isn’t undermined.
Speaking of Treasury secretaries, President-elect Biden has made a decision on who he will nominate for Treasury secretary and will announce his choice “either just before or just after Thanksgiving.” The top three candidates are Fed Governor Lael Brainard, former Fed Governor Roger Ferguson and former Fed Chair Janet Yellen. Brainard or Yellen would be the first female Treasury secretary, and Ferguson would be the first black person to hold the office. The two candidates not chosen should be on the short list for head of the National Economic Council.
Federal Reserve Bank of Dallas President Robert Kaplan said during an interview that he was “not ruling out” the possibility that the economy could slip back into a recession as COVID-19 infections surge around the country. While all the current risks “are all to the downside,” Kaplan expects strong growth next year, as any negative growth or rebound stall should be temporary.
European Union (EU) leaders were unable to make progress on bridging the gap between divisions on the EU’s stimulus package. The effective veto from Warsaw and Budapest revolves around their opposition to tying aid to rule-of-law conditions and means stimulus will not be up and running at the beginning of 2021 as originally planned.
Brexit talks have hit a snag with members of the EU negotiating team testing positive for COVID-19. Talks will continue remotely, with EU sources claiming the deal is 90% done but warning that critical agreements on key issues remain elusive, as the European Commission told government envoys that the U.K. has not moved to the last three hurdles.
China left its loan prime rate unchanged for the seventh straight month as was widely expected.
In Thailand, the central bank introduced measures to encourage outflows in an effort to combat currency strength. The bank will also require the registration of local and overseas bond investors to “allow close monitoring of investors’ behaviors and thereby enable the implementation of targeted measures in a timely manner.” Increased inbound investment flows searching for higher yields into emerging market countries such as Thailand have led rapid currency appreciation. Overall, the implemented measures are relatively benign compared to currency intervention, on which the country has to tread lightly as it has already been placed on the U.S. Treasury’s watch list.
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