Morning Commentary: The Evolving Link Between COVID-19 and the Economy

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

The Evolving Link Between COVID-19 and the Economy Share this story: Andrew Kositkun Foreign Exchange Head Trader

Historically speaking, the COVID-19 infection curve tended to trough around a holiday and then spike higher afterward as gatherings spurred new infections. With the Thanksgiving holiday roughly two weeks behind us, data shows the COVID-19 crisis to be significantly worse than in the spring. Granted, increased testing rates means current case numbers are not perfectly comparable with the spring. Nevertheless, estimates from the Institute for Health Metrics and Evaluation show that true daily infections peaked at 290,000 in late March and will peak at around 525,000 by the end of this month. Although there is a better understanding of how to treat COVID-19, deaths are also setting new records. Even if new cases were to suddenly plateau, deaths should continue to rise due to the four-week lag between the two series. Over the past couple of months, 1.5%–2.0% of confirmed cases from four weeks earlier resulted in fatalities. Recent data on fatalities compared to case counts seen four weeks ago has been in line with historical trends and, if anything, has been near or above the upper end of the range. Extrapolating forward, a daily death count that is more than double the peak in the spring is unfortunately very likely. Despite the rise in case numbers and fatalities, pandemic fatigue and pressure on local officials have kept the economy open as much as possible. Moreover, with federal safety nets largely gone, local officials know that the shock from any shutdown will be much greater to the local economy. With no good choices, people, policymakers and the markets are trying to look through the bad news, with hospital/ICU capacity, not case numbers or other factors, increasingly being the driving variable for public policy changes and the link between COVID-19 and the economy. So far the economic damage has been relatively modest, but risks remain in the labor market, as cold weather hurts restaurants and other businesses. On the positive side, retail sales have proved resilient, as cold weather and distancing measures do not stop online shopping, but the rise in initial jobless claims is concerning as payrolls could flatten in December and potentially go negative in January. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.S. initial jobless claims jumped to 885,000, the highest level in three months, against market consensus for 818,000 claims. Continuing claims fell to 5.51 million from 5.78 million and beat estimates for 5.7 million claims. Congressional lawmakers hope to vote on a $900 billion stimulus plan today. This plan is expected to include $17 billion for airlines but not include state and local aid and liability protections. On the virus and vaccine front, the FDA will meet today to discuss approval for Moderna’s vaccine candidate, as the U.S. suffered a record 3,835 deaths yesterday. Vice President Mike Pence will publicly receive the vaccine shot tomorrow, with President-elect Joe Biden expected to be inoculated next week. President Emmanuel Macron of France has tested positive for COVID-19. The U.S. Treasury has labeled Switzerland and Vietnam as currency manipulators. The report also added Taiwan, Thailand and India to the watch list. The consequences of being labeled a manipulator through conventional channels comes in two steps and is measured and slow moving. The first step is a yearlong enhanced bilateral engagement followed by remedial action if negotiations fail. With only five weeks left in the Trump administration, the consequences of being named a manipulator have been reduced, as there is limited opportunity for unconventional measures. Furthermore, a Yellen Treasury in the Biden administration is more likely to follow the conventional playbook, lowering the tail risks of unconventional follow-through. The Fed held rates unchanged as expected but published macro forecasts that were all upbeat, with faster growth, higher inflation and lower unemployment. Nevertheless, the bank changed its forward guidance to say that the current pace of asset purchases would continue until “substantial” progress was made on its dual mandate. Previously, the guidance was for purchases to continue for “the coming months.” In essence, the Fed will remain accommodative for the foreseeable future. The Swiss National Bank (SNB) left its deposit rate unchanged at -0.75% as widely expected. Furthermore, the SNB stressed its policy would be unaffected by the U.S. Treasury report. The Bank of England left rates unchanged, as expected, amid Brexit talks. The central bank also kept its total asset purchase target. The Norges Bank delivered a hawkish hold, as it kept rates unchanged at 0.0% but accelerated its outlook for gradual rate hikes to the first half of 2022. Australia reported strong jobs data, with employment rising by 90,000 jobs, which more than doubled market consensus for 40,000 additional jobs. The breakdown between full-time and part-time jobs was good, as full-time positions accounted for almost 94% of the jobs created.

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