Morning Commentary: Real Time Tracker

Foreign Exchange - Morning Commentary
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The spread of the virus since the middle of June has had a clear negative impact on economic activity.  Data out of the Dallas Fed and Google shows that mobility has stalled in July.  Consumers have become more hesitant to take part in activities for which distancing is difficult to do with air travel and dining in at restaurants showing the clearest change; it is clear that the economic recovery cannot be separated from the path of the virus.  

Nevertheless, there are some positive signs.  The growth in new COVID-19 cases in the US appears to be slowing as the 7-day moving average has turned lower.  To be clear, the number of daily new cases remains elevated and the 7-day moving average is still up from the beginning of last week but is marginally lower when compared to the 7-day average as of the end of last week.  The positivity rate has also moved down to 8.5% from 9.0%.  

While these are positive developments, it is important to remember that it’s still too early to signal the all clear.  Daily deaths continue to move higher following the spike in infections since mid-June.  Unfortunately, this trend should continue over the next couple weeks even if new infections stabilize or drop given the correlation and lag time between cases and deaths.  The good news is the correlation has dropped so the uptick in mortality shouldn’t rise as quickly as it did in March and April.  The bad news is that mortality numbers should not stabilize for several weeks, even if infection numbers do, which could weigh on economic performance.  

Looking ahead, President Trump’s course reversal to endorse the use of masks as “patriotic” has the potential to be an inflection point.  Like seatbelts, mask wearing has virtually no impact on the economy, but there is compelling evidence that its widespread usage slows the spread of the virus.  Public opinion polls find that Republicans are much less likely to wear masks than Democrats or Independents.  Should the President’s endorsement carry more weight with people who don’t wear masks regardless of what any scientist or other politician says, it could be a positive factor for controlling the virus and the economy. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Equity markets around the world have turned negative due to US-China concerns.  China has asked the US to close its consulate in the city of Chengdu in retaliation to the US’s decision to shut down the Chinese consulate in Houston.  The US consulate in Chengdu is a key listening post for developments in Tibet.  Closing the consulate in Chengdu is seen as less impactful than closing missions in Hong Kong or Shanghai but more impactful than closing the consulate in Wuhan.  
  • The GOP’s stimulus package proposal has been delayed until Monday as the party continues to work on consensus.  
  • Data from the Main Street Lending Program suggests it may not be as impactful as hoped.  Lenders and borrowers have raised questions around the complexity of terms.  Conversely, the Fed attributes the low usage as a sign that companies are able to access capital elsewhere.  
  • Euro area economic activity grew for the first time in five months as July composite PMI came in better than expected at 54.8 with both services and manufacturing picking up momentum as they both reentered grow territory.  Given that, today’s reading more likely represents a rebound from depressed levels than a definitive return to a post COVID-19 growth trajectory.  
  • UK PMI also beat expectations with the composite reading coming in at 57.1 against expectations for a 51.7 print.  Services and manufacturing also beat expectations and moved back into expansionary territory.  The uptick in services momentum is especially notable as it was a key driver for the weak May GDP number. 
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