New cases of COVID-19 surge in the US….
The situation continues to deteriorate in the US. The seven-day moving average of the number of new cases recorded each day is now running around 67 000, more than three times the level recoded just a month ago.
The now familiar 'hot spot' states in the south and west continue to report test positivity rates, and it is likely that the data understate the true spread of the virus given the long waiting times for results and test kit shortages.
This upsurge in cases, hospitalisations and fatalities has forced a response: 22 states, which account for more than 55% of US GDP, have either put re-opening the economy on pause or have actually gone into reverse. The high-frequency data suggests the public is moving ahead of the politicians: retreating from public spaces voluntarily to reduce the risk of catching the disease, regardless of whether the authorities mandate social distancing.
A mixed picture elsewhere
Away from the US, some countries that appeared to have the virus under control have reported new spikes in infections. Indeed, in Hong Kong and Israel, new cases have surpassed the peak in the spring, pointing to a more sustained outbreak. However, in contrast to the first wave, when cases were primarily imported from abroad, it appears that these new spikes in infections reflect more substantial community transmission.
In continental Europe, the virus remains largely under control. As such, mobility continues to improve, led by France. Spain is a laggard due to the re-imposition of restrictions, as reflected in the Oxford Stringency index where Spain once again has the most restrictive policies in the EU-4.
In terms of progress on vaccine, this week saw two important developments: the Oxford University research team and a CanSino Biologics team in China published peer-reviewed results from their early-phase human vaccine trials, clearing the way for the efficacy trials. Both groups reported significant immune response in the form of neutralising antibodies and T-cell responses with what seems to be minimal side-effects.
At a World Health Organisation briefing, Mike Ryan, who heads the group's health emergencies programme, welcomed the achievements. He added that while the results are positive, “There’s a long way to go… these are phase one studies. We now need to move into larger-scale real-world trials.”
According to a survey of investors, more than half the market professionals polled expect a vaccine to be ready in the next 6-12 months, so some vaccine optimism seems to be priced in.
Economic data – resilient consumer spending
The key release last week was US retail sales data. Sales rose by 7.5% on the month, beating expectations (+5%) handsomely. Growth in headline sales is now positive year-on-year and the level of sales is only marginally below that in February. In short, this key high-frequency indicator of expenditure looks decidedly like it is in a V-shaped trend.
However, first impressions can be deceiving. Retail sales provide an incomplete picture of overall consumption. Expenditure on consumer services is not captured and social distancing has affected this category disproportionately.
Moreover, we would expect to see a transitory increase in spending on consumer goods as lockdowns end, with households replenishing stocks of semi-durable and durable goods and some degree of substitution for categories where spending is constrained (e.g., eating out or taking a holiday).
Nonetheless, the resilience of consumer spending is a genuine feature of this recession. In our view, it is explained by the unusual and muscular fiscal response. When unemployment rises in a recession, disposable income typically falls and so does consumer spending. In this recession, finance ministers have gone to great lengths to support the incomes of large numbers of people who have been furloughed or lost their jobs. However, that support will not last indefinitely. At that point, spending may falter.
Markets – a positive backdrop
- European leaders agreed on a EUR 750 billion recovery fund, with grants amounting to EUR 390 billion and loans of EUR 360 billion. The deal is positive news for European economies as it dispels uncertainty and can be expected to speed up the recovery of weaker eurozone economies.
- In the US, hopes for a supplemental USD 1.3 trillion stimulus package have supported risky assets. However, a lot depends on whether it can be voted in before the summer recess and before current support programmes run out.
- Market consensus remains for GDP levels to recover their 2019 levels by 2021. The weaker employment picture will likely keep inflationary pressure at bay and allow central banks to maintain accommodative policies. Interest-rate futures contracts are not pricing any significant pick-up in bond yields before December 2022. Low interest rates and support from central banks are likely to continue to provide a positive backdrop for risky assets.
- Both implied and realised volatility are normalising with the VIX index back at end of February levels and equity markets continuing to recover. The combination of reduced European political uncertainty, lower volatility and ample levels of accommodation are also supportive of risky assets.
- Second-quarter 2020 earnings reporting kicked off in the US last week and is starting this week in Europe. So far, only 12% of S&P 500 companies have announced results: earnings have declined by around 20% and they have beaten analyst expectations. Investors have largely discounted weak earnings for 2020. Markets are focusing on the expectations for an earnings recovery for 2021 despite little forward guidance from companies so far.
- Finally, in foreign exchange markets, the USD continues to weaken, especially versus the EUR amid the positive news on the EU recovery fund. Given that structural support for the US dollar has eroded as both growth and rates differentials have significantly narrowed, USD weakness may have further to go.
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