Many elements of the Coronavirus Aid, Relief, and Economic Security Act (CARES) are set to expire at the end of this year without further action from Congress. Specifically, the expiration of the federal unemployment insurance (UI) programs, the eviction moratorium and the suspension of student loan payments will have a negative economic impact. Here’s a look at what this potential impact could be.
The CARES act expanded UI eligibility and duration during the pandemic. The Pandemic Unemployment Assistance (PUA) program gave benefits to workers who are normally ineligible for regular state UI programs, such as contract and self-employed workers. The Pandemic Emergency Unemployment Compensation (PEUC) program gave an additional 13 weeks to those who have exhausted their regular state UI benefits. These programs will expire Dec. 26.
According to analysts at the Century Foundation, approximately 12 million workers enrolled in PUA or PEUC will see their UI benefits cut off at year-end. This will translate into a $39 billion income shortfall in the first quarter of 2021. An income loss of $39 billion translates into a 1.2% annualized hit to growth. Beyond direct impacts, many workers currently on regular state UI programs will exhaust their benefits without a safety net. There are roughly another 2.4 million workers set to exhaust their regular state benefits by the end of the first quarter, which would lead to another $8 billion income hit that equates to a 0.3% annualized hit to growth.
Admittedly, the above estimates are near the upper bound, as it assumes all workers exhausting benefits will remain unemployed for the entire quarter. This is unlikely to be true, but even so, the point that the economy is on track for a significant hit is still valid.
The CARES act also provided temporary payment relief. According to a survey by the Urban Institute, a third of landlords reported not being paid rent in full in September. This means that approximately 30 million renter households are at risk of eviction once the moratorium expires. Further, according to a survey by the Census Bureau, 30% of renters and 12% of homeowners with mortgages have slight to no confidence that they will be able to make next month’s payment. While it is difficult to assess the growth impact from the expiration of temporary debt relief, studies on foreclosure-related sales show that they have sale prices 27% lower than comparable properties, and each foreclosure lowered the selling price of nearby non-foreclosure properties by 1%.
As for student loans, consumers will have to resume payments in January. Per the New York Fed, the payment freeze saved borrowers $7 billion a month, making pending payments a material economic headwind.
With the expiration of these programs, the economy will be operating without a safety net. Thankfully, this should only be for a short while, as Congress and the incoming Biden administration should strike a deal on a new stimulus package after inauguration. However, time is of the essence, and any delay adds headwinds to a fragile economy.
The euro has moved sideways over the last two weeks, as rising COVID-19 numbers and concerns surrounding more severe near-term lockdowns have countered vaccine optimism. Until a vaccine becomes widely available, there are few alternatives to more restrictions in Europe and the U.S., where case numbers and hospitalizations remain high. The resulting safe haven demand for the dollar, the U.S.’s economic outperformance relative to Europe, delays in the implantation of the EU fiscal stimulus package and increased expectations for ECB dovishness will likely cap EURUSD gains.
Once again, the pound outlook continues to be about Brexit. The pound appreciated this past week on reports that the U.K. and the EU have identified a landing zone for a deal as early as this week. Given this, talks could easily slip into early December before a deal, if any, is reached. Should a deal be struck, the pound could rally further as the worst-case scenario of a no-deal exit is priced out. However, a skinny deal that excludes large parts of the service sector will still incur an economic cost. Despite a deal, the U.K. will have less favorable terms than the status quo with its largest trading partner. Once we get past the initial relief rally, it’s possible that markets will refocus on the increasingly negative economic backdrop and implementation concerns around Brexit, leading to a “buy the rumor, sell the fact” event.
After popping up over 105 in the interbank market two weeks ago on positive vaccine news and higher U.S. yields, USDJPY has recovered most of its losses. In the near term, expect overseas factors to drive the yen more than domestic ones, as the currency remains caught between positive vaccine expectations and resurging infection numbers. Additionally, a pullback in investment flows, relative to the beginning of the year, represents a reduction in what was an idiosyncratic source of yen weakness. Expect further range trading with a bias for yen appreciation.
The Canadian dollar has underperformed its peers over the past month due to rising COVID-19 cases domestically and a pullback in expectations for large U.S. fiscal stimulus that would have benefited Canada through its closely integrated supply chain. In the near term, expect the loonie to be driven by broader risk sentiment as markets reassess the recovery outlook as progress on a vaccine offsets winter COVID-19 waves. With shorter-term implied Canadian dollar volatility below its longer-term equivalent, we could be in for a period of consolidation.
The Chinese yuan initially weakened following the initial wave of positive vaccine news, as a vaccine reduces China’s COVID-19 outperformance advantage. Of course a vaccine is only relevant once there is widespread distribution, and subsequent to the market’s initial reaction, USDCHY continued on its march lower, as the factors supporting currency appreciation remain in place. The incoming Biden administration is expected to keep pressure on China, but trade tensions should ease, as the U.S. should rely less on tariffs and more on a coordinated approach. Relatively higher yields in China, COVID-19 outperformance, reduced trade uncertainty and a current account surplus economy that continues to perform should warrant a bullish yuan stance.
The view remains for a weaker Australian dollar. While the country did deliver a strong jobs number this past week, recent strength is seen more as a function of positive global risk sentiment. Headwinds include safe haven demand and Australia–China trade tensions. Regarding trade, expect Australia–China tensions to continue to weigh on exports and overall market sentiment and suppress additional investments, such as mining companies pursuing capex to take advantage of high iron ore prices. On monetary policy, Reserve Bank of Australia minutes confirmed that the bank views negative rates as “extraordinarily unlikely” and that its QE program will be a main focus going forward, with the bank prepared to do more if necessary.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.5%
Expectations for rates to remain unchanged at 0.0%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
U.S. Manufacturing and Services PMI
Expectations for a 53.0 and 55.0 print, respectively
U.S. Consumer Confidence
Expectations for a 2.9 decline to 98.0
U.S. Initial Jobless Claims
Expectations for 733,000 claims
U.S. Durable Goods
Expectations for a 0.9% increase
EZ Manufacturing, Service and Composite PMI
Expectations for a 53.3, 42.0 and 45.6 print, respectively
U.K. Manufacturing, Service and Composite PMI
Expectations for a 50.5, 42.5 and 42.5 print, respectively
German Manufacturing, Service and Composite PMI
Expectations for a 56.0, 46.3 and 50.5 print, respectively
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