US situation: ‘Disturbing’
With the world’s largest economy accounting for roughly a quarter – more than 131 000 – of the global death toll (almost 550 000), Dr Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases in the US, described the situation as ‘disturbing.’
Hot spots in the south and west have continued to drive the numbers. Worryingly, test positivity is high and rising. Nationwide, it is now at 9.0% from below 5.0% several weeks ago. Arizona stands out with more than a quarter of its tests coming back positive, Texas at 14%, Florida at 19%, and California at 7.5%. More than 30 states now have R(t) values of more than 1.0.
Six states have now partially reversed their re-openings, at least 21 states have delayed re-opening and a growing number of states have announced mandatory mask-wearing.
Polling data suggests that Americans are more worried about the virus today than they were in May; more people are using a mask in public and a majority is worried about the lack of social distancing.
Fortunately, fatalities have decoupled from cases. This probably reflects a combination of factors.
- First, increased testing is likely revealing more of the COVID iceberg – we can now see the large numbers of people with mild symptoms who might not have been captured before.
- Second, with younger people accounting for a larger share of new cases, we would expect to see fewer fatalities. Whether this situation will persist is unclear: If the disease passes from the young to the old, we might see fatalities rising sharply.
Latin America continues to see around 40% of the new cases, but is responsible for around 50% of fatalities. Brazil is second only to the US in terms of cases.
At the other end of the spectrum, countries with a relatively good track record have been re-imposing restrictions on mobility after spikes in new infections. Victoria, Australia’s second-most populous state, is locking down the Melbourne area for six weeks. Israel has re-imposed restrictions on bars, nightclubs and gyms to regain control.
There was troubling news about a potential mutation of the virus from no less an authority than Dr Fauci. In an interview with the Journal of American Medicine, he said, “Evidence is growing that a mutated coronavirus strain, the main one circulating in the Houston area, is more contagious than the original virus in China … We don't have a connection between whether an individual does worse with this or not. It just seems that the virus replicates better and may be more transmissible.”
Data points to progressing normalisation
Investors are increasingly using unconventional high-frequency indicators such as driving mobility (exhibit 1), mobility around workplaces, road congestion, railcar load, electricity and petrol demand – to gauge the recovery in social and economic activity. This data paints a picture of continued normalisation in western Europe, but loss of momentum in the US, led by states that have seen a rise in new cases.
Among the conventional data, the latest German industrial numbers pointed to a bounce in May, but also underlined just how far from normality this key engine of the eurozone economy was as the country started to exit lockdown. Manufacturing sector production and sales are over 20% below the 2019 average, orders are around 30% below. Orders from beyond the eurozone are the weakest.
Eurozone retail sales rose by almost 18% in May, reversing much of the March plus April decline and leaving spending a little over 5% below the 2019 average. Nationally, German sales were 3.6% above February’s level, before the lockdowns. Spanish sales were still down almost 20% on February.
In recent weeks, we fretted about what survey data was telling us about the pace of the recovery and whether it would be L-shaped (‘bumping along the bottom’) rather than a V-shaped bounce.
Encouragingly, survey data for the US non-manufacturing sector far exceeded expectations in June and clearly beat May’s numbers. There was a drop in the number of companies reporting a decline in activity on the month and a marked rise in those reporting an increase.
For a sense of perspective, a look at the US labour market. Almost five million jobs were created in June, unwinding some of the massive losses (22 million in March/April together). However, this reflects mainly employers rehiring staff who had been laid off temporarily as the economy restarted. Only some 40% of jobs lost have been restored and momentum is likely to reverse this month.
So, will it hold in Q3?
Will economic data stay favourable as we head into the third quarter, winning out as the dominant factor in markets? Will the numbers keep concerns about (local) spikes on COVID-19 cases and the possibility of (partially) renewed lockdowns on the backburner? It remains to be seen.
What is clear is that while interest in the topic will wax and wane, especially as the summer holiday mood strikes markets, it will take little for the prospects of the virus to claim centre stage and rattle policymaker and investor nerves.
As the third quarter winds up and the northern hemisphere prepares for autumn and winter, thoughts are likely to refocus on the chances of a second wave.
In the second quarter, US investors pushed equities to their strongest quarterly performance since the fourth quarter of 1999 as they cheered the re-opening of the economy, the Federal Reserve’s ‘whatever it takes’ mantra, and improvements in US employment and consumption data.
Over the past week, global stocks jumped as Chinese markets surged. Markets were propelled by hopes for a strong recovery by the world’s second largest economy from the coronavirus pandemic, or by traders brushing off local coronavirus concerns, and by Chinese state media talking up the prospects of the local market.
Equities were also buoyed by the news of a bounce in purchasing manager indices, pointing to a recovery in economic activity. Data flagged continued progress in China after February’s low. Indicators in the US and the eurozone signalled an improvement from the lows in April.
Global stocks later fell on worries that the recent rally had outpaced the economic recovery and that reinstated restrictions on business could result in a renewed growth contraction. Even in a more upbeat scenario, global GDP is expected not to return to the pre-crisis peak for two years.
While the – for now – brighter picture appears to have encouraged investors to shift out of money market funds, money was moved mostly into corporate bonds, with a high share going to high-yield. This preference over government bonds can be seen as motivated by the continued hunt for yield.
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