Morning Commentary: Second-Round Stimulus Effects

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Second-Round Stimulus Effects Share this story: Andrew Kositkun Senior FX Advisor

One of the unique features of the COVID-19 shock has been the uneven impact on goods and services spending. Under normal circumstances, fiscal stimulus leads to a surge in both goods and services, but the COVID-19 shock has shut down services and severely constrained spending in the services sector. Unfortunately, this means that fiscal spending has been operating with one hand tied behind its back.  Fortunately, unused services spending and stimulus money have not disappeared but rather has been accumulated in liquid savings accounts. As a result, the economy could be in for a delayed, second-round stimulus when the services side of the economy reopens.  So exactly how big could this second round be? It’s difficult to pin down an exact number, but here’s a back-of-the-envelope calculation. From 2018 through the beginning of 2020, Americans had a personal savings rate of roughly 8.25%. By comparing actual household savings to savings assuming a flat 8.25% saving rate, we are able to ballpark “excess savings” of about $1.4 trillion. Of course these calculations do not include the recently passed $900 billion stimulus package, let alone President Joe Biden’s proposed $1.9 trillion package. Extrapolating the calculation above means that there should be an additional $100 billion in “excess savings” coming down the pipeline.  Of course, it is difficult to gauge the precise impact that this accumulation of “excess savings” will have on the economy, but it is fairly clear that the impact should be positive. Currently, the median growth forecast in the U.S. is for 4.1% growth. Downside risks stem from issues on the COVID-19 front. However, the dry power from “excess savings” could mean that the upside risks are even larger.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Director of the National Economic Council Brian Deese is expected to hold bipartisan talks with a group of 16 senators on key elements of President Biden’s $1.9 trillion stimulus proposal in the coming days. Biden and Vice President Kamala Harris are also expected to engage with lawmakers from both parties to discuss the proposal. Emergency unemployment benefits are set to expire mid-March, so further action is needed sooner rather than later.  U.S. services and manufacturing PMI both came in better than expected with manufacturing coming in at 59.1 against consensus for a 56.5 print and services coming at 57.5 against consensus for a 53.4 print.   Euro area PMIs dropped in January, as both services and manufacturing fell in countries that pre-emptively extended and tightened restrictions to fight the new virus strain. With the worsening epidemiological picture weighing on consumers, negative headwinds are hitting both the supply and demand sides, increasing the risk for a negative first-quarter GDP print.  U.K. PMIs disappointed across the board, with the sharp drop in services of particular note as the third national lockdown takes it economic toll. Based on this latest reading, the third national lockdown is hitting the economy harder than the second lockdown but not as hard as the first lockdown. Unfortunately, U.K. officials are hinting that current lockdown measures are likely to remain in place for longer than expected.  Japanese PMI data, which reflected renewed lockdown measures, disappointed across the board. Additionally, national CPI fell to -1.2% year over year from the previous reading of -0.9% year over year.  Australian PMI numbers also disappointed, as both services and manufacturing reads fell across the board. Retail sales also disappointed, as they fell 4.2% month over month against expectations for a 1.5% decline. For context, last month’s retail sales posted a 7.1% month-over-month gain.  Hong Kong authorities issued a lockdown in Kowloon. These new restrictions will cover the most urban parts of Hong Kong and include mandatory testing for residents who want to leave the area.

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