Morning Commentary: The Vaccine Upside

Foreign Exchange - Morning Commentary
The Vaccine Upside
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
In yesterday’s morning commentary, we discussed how the vaccine might not be the immediate game changer for which some are hoping.  While this could be the case, a vaccine is still clearly a positive from a health and economic point of view.  So what are the main channels through which the vaccine will benefit the economy?

The first channel would be consumer spending.  On an aggregate level, consumer spending has rebounded impressively but growth hasn’t been uniform.  Gains in goods have been disproportionally large compared to spending on services.  Within services, the recovery in entertainment and travel have been particularly weak. 

Once there is a vaccine, pent up demand in these areas should be released.  This argument for a shift back to experience-based spending is easy enough to make, but the question of where the money comes from is a much more nuanced question.  Will the pickup in spending be a boost to overall spend or will it be a shift in allocation of dollars?  Likely, it will be a combination of the two.

The second channel will be business spending which has recovered slower than consumer spending.  A key limiter of business spending has been new business formation and the destruction of current business. Many businesses have closed their doors with others downsizing.  Unfortunately, it takes more than a switch flip to bring these businesses back, and this will limit the upside to business spending.   

There are also questions around the types of business spending that will occur after a vaccine is available.  Most likely, spending will be concentrated in R&D and intellectual property more than equipment.  Even with the vaccine, businesses will be operating under a high level of uncertainty, which should limit the appetite for large capital goods.  Expect a similar dynamic with commercial real estate although the labor market should be more seamless.  It should be noted that the latest jobs report showed that the labor force has failed to recover.  To the extent that this is due to health concerns, a vaccine should increase the labor supply and make it easier to hire workers.
  • Questions continue to swirl around US-China relations with President Trump revealing that he cancelled the scheduled six-month review meeting between the two countries as he doesn’t “…want to talk to China right now.”  When asked whether the US would pull out of the Phase 1 deal, the president said “we’ll see what happens.”  This latest development only adds more uncertainty to a relationship that has grown increasingly contentious due to actions on both sides which includes the US ramping up pressure on everything from democracy in Taiwan and Hong Kong to tech apps such as WeChat and TikTok.  On China’s part, the country’s response to the cancelled meeting has been relatively muted thus far. 
  • The USD continues to remain under pressure with Fed actions turning what was a USD shortage into a surplus as the Fed’s balance sheet expansion has been one of the most aggressive in the world.  The FOMC minutes will be released today.  With the pandemic still posing significant risks, the markets will be focused on clues around inflation targeting and forward guidance.     
  • Democrats have signaled a willingness to meet Republicans halfway on a stimulus deal.  House Speaker Pelosi raised the possibility of passing a scaled back deal now with more legislation to come after the November elections.  The Republican side also issued statements that sounded more conciliatory as Mitch McConnell said the Democrat’s willingness to breakout Postal Service funding from the original plan was an opening for talks. 
  • Virus measures continue to be ramped up around the world.  Ireland is tightening restrictions on gatherings and New Zealand has increased its military presence at its borders.  Germany has also ruled out any further loosening of virus measures as the number of new cases has doubled over the last 3 weeks.  In total, there have been over 22 million cases globally with the US, Brazil and India accounting for more than half of those cases.
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