Morning Commentary: To “V” or Not to “V,” That is the Question

Foreign Exchange - Morning Commentary
To “V” or Not to “V,” That is the Question 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
An increasing number of governments have started making plans on how to reopen their economies.  The timing of such moves remains uncertain, but eventually, we will make it past the current COVID-19 crisis.  This leaves the next question of how the economy will look on the other side.  The hope is that the recovery will be more “v” shaped than “w” shaped, but economic forecasting has always been a tricky endeavor.  This task has been made more difficult due to the unique disconnect between desired spending given the economic background and actual spending due to government imposed constraints.  As such there really is no historical precedent to provide a recovery template.   

What is clear is that spending has collapsed due to strict social distancing measures.  When the economy opens, it is reasonable to expect initial spending to rise, with the possibility of an overshoot due to underspending during the lockdown.  Ultimately, the expectation will be for spending to normalize under its previous level due to confidence shocks.  My belief is that persistence of this shock increases the longer the economy remains shut down.  

This sluggish restart to the economy isn’t the only risk to a “v” shaped recovery.  The ability to reopen the economy while maintaining control of the virus is also important.  Issues such as noncompliance and inadequate tracking of hot spots represent risk factors that could force another shutdown which argues for a “w” recovery. 

These risks for a “w” recovery makes it prudent to monitor other countries that are further along the containment process.  China has reopened its economy but doesn’t serve as a good benchmark as it has greater control over the movement of people and lingering questions around the integrity of its data.  Alternatively, Austria, which was the only European country to go into immediate lockdown, represents a better alternative. 

Currently, Austria plans to let people back to work with a requirement to wear a mask outside the house while keeping less economically impactful functions (schools/universities/cultural institutions) closed.  Likely, this will be similar to the blueprint used in the US and these similarities make the Austrian experiment a relevant case study to follow. 
  • The Fed unleashed another series of steps to provide as much as $2.3 trillion in additionally aid to the markets.  Included in this last round of stimulus are $500 billion for states and municipalities, $600 billion of loan purchases to help SMEs and the purchase of junk-rated corporate bonds.  
  • U.S. initial jobless claims printed another stunning number with last week’s jobless claims coming in at 6.6 million.  Additionally, the prior print was revised up to 6.9 million from 6.6 million.  Over the last three weeks, 16.8 million jobless claims were filed.  
  • Canada’s labor report printed a large drop in employment.  The print of  ~1 million jobs lost more than doubled consensus for a 500K reduction in employment.  The unemployment rate also increased to 7.8% from 5.66% prior.  
  • European Finance Ministers continue to discuss possible options for Europe’s fiscal response with a teleconference scheduled at 11 am eastern time.  Key obstacles include disagreement over the conditionality attached to the use of the ESM and the mutualization of debt. Hope remains for a deal but if one is struck, the risk is for an underwhelming one.   
  • The UK’s February GDP number failed to show the expected post-election bounce in activity.  This raises questions around the UK economy’s ability to rebound once lockdown measures are lifted and puts March GDP at risk for a double digit MoM decline.  
  • Infection numbers out of Europe have taken a negative turn with Italy extending its lockdown another two week.  The UK reported record number of daily deaths with its peak still to come.  
  • Oil is higher on the session ahead of today’s OPEC+ meeting as markets price in a supply cut.  The relevant question now is how close the actual cut is to the 10 million barrels/day production cut mentioned in the markets.  
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