Morning Commentary: Delayed Effects

Foreign Exchange - Morning Commentary
Delayed Effects
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The large spike in US cases, specifically along the Sun Belt, has been accompanied by a relatively modest uptick in deaths.  Whether or not mortality rates follow the increases in new cases will be a key determinant on the ultimate shape of the economic recovery.  A material increase in deaths likely leads to increased voluntary distancing and creates political pressure to further reverse the re-opening process. 

In an attempt to understand what could happen to mortality rates amid rising case numbers, we took a look at correlation data between new cases and deaths.  In April, this relationship was almost one to one with deaths lagging new cases by just over a week.  The latest data shows that the correlation has dropped to around 50% with the lag increasing to around 5 weeks. 

The lower correlation and longer lags are consistent with three factors.  The first is the increase in testing.  Increased testing increases the number of cases, which increases the number of less severe cases identified.  These less severe cases are less likely to lead to death and lowers the correlation between cases and deaths.  Increased testing also means earlier detection of case that will eventually become severe, leading to a greater lag time. 

The second factor is the increasing number of younger people becoming infected.  Younger people have stronger immune systems which means a lower mortality rate and a longer lag between infection and death for those who don’t recover.  Finally, there has been an improvement in treatment of the disease, which should break down the correlation and time between cases and deaths.

The takeaway from this is that more bad news is coming for the economy.  The decline in correlation is good news as it means the current surge in cases should not lead to as many deaths as there were in March and April; however, the increase in lag is bad news as it means increased deaths are expected to follow even if cases stabilize. 
  • US-China tensions escalated further as the US ordered China to close its consulate in Houston within 72 hours.  According to the State Department, the closure was ordered “to protect American intellectual property and Americans’ private information,” and Senator Marco Rubio classified the building as a massive spy center.  China described it as an “unprecedented escalation” and is reportedly considering shutting down a US consulate in China.  Overall, this is seen as one of the biggest blows to the US-China relationship in decades.  Expect further escalation as we move closer to the US elections.  The US is split along many issues but has consensus around taking actions against China. 
  • Talks around the next round of US stimulus appear to have stalled as time is running out before the scheduled August recess.  President Trump’s call for a payroll tax cut remains one of the key points of contention as Republicans and the White House have yet to agree on a proposal.  Regarding the $600/week unemployment insurance subsidy, there are several proposals being considered. 
  • President Trump’s two nominees (Waller and Shelton) to the Fed have advanced to a full Senate confirmation vote.  Of the two, Shelton is the more controversial pick due to her past comments on moving back to the gold standard and lack of central bank experience.  Shelton passed the Senate Banking Committee with a 13-12 party line vote.  Waller passed with an 18-7 vote and is a more conventional candidate.     
  • The euro extended gains to touch its highest level in almost 2 years after European Union leaders reached an agreement on a stimulus package.  In the UK, reports indicate that the UK is abandoning hope of a Brexit Trade Deal.  The current round of talks between the UK and EU is scheduled to wrap up tomorrow with no signs of progress.  While the transition period ends at the end of 2020, the true deadline for a deal is late October/early November to allow time for ratification.  It remains to be seen whether or not all of this is posturing, but at a minimum, it should put a lid on sterling. 
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