COVID-19 case numbers continued to rise with signs that further restrictive measures may be required. In the US, fiscal action is required for the Federal Reserve’s new framework for US monetary policy to succeed. Valuations in US tech stocks have fallen over the last week in what appears to be a bout of consolidation.
Over the last week, the number of global COVID-19 cases since the outbreak began rose above 27 million along with 900 000 fatalities. There was a surge in cases in India that put the country ahead of Brazil as the nation with the second most cases, after the United States.
US COVID-19 trends continued to improve slowly. Nationwide, new cases have plateaued at just below 40 000 per day for the past two weeks while deaths have come down to 800 daily, from nearly 1 000 two weeks ago. Around 700 000 tests are conducted daily, compared to 800 000 at the peak at the end of July, with a positivity rate at 5.3% – this is still above what was the most recent trough in June of 4.3%.
By way of a reminder, based on the testing experience in other parts of the world, the share of positive tests needs to decrease to below 5% and remain there for several weeks to signal an actual suppression of the virus. Looking ahead, some epidemiologists worry that US school re-openings after the summer combined with the gatherings over last weekend’s Labor Day holiday, will reverse some of these positive trends.
In the eurozone, infections have risen persistently, led by Spain and France, where new cases have now surpassed the March-April peak. France is reporting rising numbers of COVID-19 patients in intensive care, while 12 French schools have had to close after reopening only last week.
Meanwhile, cases in the UK have surged to their highest since May at above 2 000 per day versus 1 000 two weeks ago leading the government to ban gatherings of more than six people, down from 30 previously. German cases have remained range-bound at 1 000-1 300. The share of tests coming back positive is highest in Spain at 9.1% (versus 7.6% a month ago), followed by France (4.6% vs. 1.6% a month ago) and Italy (2.3% vs. 1.1% a month ago).
For now the rate is at below 1.0% in both Germany and the UK. While increased testing is no doubt good news, one recent study found that 4 in 5 patients with COVID-19 symptoms report not fully self-isolating in England. Testing alone is clearly insufficient to contain the spread of the virus if in fact patients with symptoms and/or a positive test and their contacts do not self-isolate.
Last week saw news that a COVID-19 vaccine trial with the University of Oxford – one of the leading candidates to reach the market – has reportedly been placed on hold after one of the trial participants in the UK was admitted to hospital with an illness potentially linked to an adverse reaction to the vaccine. While this is a setback to what so far has been an encouraging development regarding the vaccine timeline, pausing the trial is apparently standard procedure to ensure the integrity of the trials, not a cause for concern, at least until the investigation of the illness and whether it is linked to the vaccine has been completed.
The US jobs report for August showed that more furloughed workers returned to their old jobs in August, with half the jobs shed in the spring back now. The unemployment rate fell by 1.8 percentage points to 8.4%. As long as the virus situation continues to improve, more furloughed workers should return to work in the next few months, keeping solid payroll growth at similar levels to what we saw in August.
Hidden by the big swings in the jobs market caused by people moving on and off furlough, the number of people who have become permanently unemployed has risen further and is now at above the level seen in the dotcom recession. For these people finding a new job is going to be much tougher than for those who are simply returning to their old roles.
In the US, the prospects of further meaningful, pre-election fiscal support appear to have dimmed. We now see the chances of a successful conclusion at around 2-in-3. That is down from around 3-in-4 a month ago.
This is an potentially critical topic because there appears to be a consensus that the Federal Reserve’s (Fed) newly announced framework for monetary policycannot succeed without fiscal support from the US government. Over the last week, a number of senior Fed officials have made this point. Governor Lael Brainard, for example, stressed that “the magnitude and timing of further fiscal support is a key factor for the outlook”. Former Chair Janet Yellen made the point that monetary policy alone is insufficient given the scale of the downturn. “There’s a little bit more the Fed can do — I would look at exploring the tool kit — but I think we also need fiscal policy in a situation like this”.
Prior to embarking on their summer recess, Congressional lawmakers failed to come to agree on another stimulus package. As a result, there was a lapse in payments of critical benefits for those US households hardest hit by the coronavirus-related lockdowns. President Trump bridged the gap with four presidential orders, but these measures provided only limited relief. The fact that some key benefits expired, such as the USD 600-per-week in extra unemployment assistance, could have a negative impact on the US recovery.
Congress reconvened on September 8. In our view, rapid action will be required to support consumers. Households generally responded well to the major spending packages passed earlier this year. If fiscal measures are not forthcoming, the prospects for the job market will worsen and the risk of scarring to the economy will rise. Initial talk suggests the next fiscal package could be as high as USD 2 trillion.
Beyond such fiscal measures, markets are looking for indications that lawmakers are working on more ambitious spending initiatives for the longer term, including infrastructure. The danger is that if the real economy in the US continues to lag developments in the financial markets, the Fed could take the blame for rising inequality and any financial instability. For the Fed’s new monetary framework to succeed, the support of Congress is essential.
In Europe, the ECB’s governing council holds a scheduled policy meeting tomorrow, 10 September, followed by a press conference with the central bank’s president and vice-president. We expect the ECB to talk a good game: signalling that the council is monitoring the outlook closely and emphasising that all options are on the table. However, we do not expect any policy action, nor do we expect a pre-commitment to act by December.
Over the last week, US technology stocks have seen their worst sell-off since March. Yesterday, the Nasdaq 100 index fell for the third consecutive day, taking it into correction territory — defined as a decline of more than 10% from a recent high. European equities, however, were resilient with the sell-off confined to US tech stocks. Taking the prior rally in tech stocks into consideration, this correction leaves the indices still at levels seen just a month ago.
Bond markets continued to ponder the consequences of the Federal Reserve’s new monetary policy framework. Market pricing seems to reflect some doubts about the Fed’s ability to generate inflation, let alone an average level of 2% over time as stipulated under the new strategy.
When the new framework was announced, yields of longer-dated US Treasuries initially rose sharply, suggesting concerns about inflation eroding the real value of the bonds’ fixed interest payments. The sell-off has, however, lost momentum. Five-year forward Inflation swaps, which measure expectations of the average level of inflation over five years, five years from now, are trading at around 2%.
The US 10-year breakeven rate, which serves as an indicator of investors’ inflation expectations over that longer period — has stalled at below 1.8%. Against this backdrop, discussions in Congress about further fiscal measures will be followed closely.
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