Sorry Coronavirus Pandemic, The Economy Has Had It With You
The global economy hasn’t got time for the pain.
Despite second waves in Australia, Japan and Spain — all countries that were deemed success stories and out of the woods — and some U.S. states like Rhode Island rolling back plans to open up, the global recovery narrative is alive and well on Wall Street.
Take that panic sellers!
Before anyone thinks the pandemic is over and the economy is going to return to pre-Covid levels, it bears keeping in mind that the economy is only recovering from being nearly completely shut down. Think of it as a dimmer switch; once turned to off, it’s now at the lowest brightness possible without flickering off. That’s kind of where most of the developed markets sit. Within emerging markets, only China is growing into positive GDP territory.
Last week’s economics data showed the global economy is on a path to recovery. Although re-accelerating Covid-19 cases are fuelling fears of ‘second waves’ in the epicenter states, their economic consequences would likely be more muted as the appetite for lockdowns again is weak.
Over the weekend we learned that President Trump will not wait for Congress to decide on some aspects of the coronavirus relief packages passed since the spring. He will extend the Federal government’s unemployment insurance, but will cut it from $600 a week to $400. Many companies, from services to assembly lines, have said they cannot get workers to come back to the shop floor because they are making more on unemployment.
Meanwhile, the central banks in advanced economies continue to be supportive of both stocks and bonds. Many people hate this as it distorts price discovery, among other things. But the Fed has seen what happens when retired persons lose 40% of their retirement portfolio due to economic crises. Unless they are buying those same assets back on the lows, which most are not doing because they are not working and likely not investing, then they have to wait years for those prices to recover.
The Fed’s moves in the market may be beneficial to big investment houses, but it is also beneficial to retirees who are “guaranteed” a backstop to major market corrections that destroy their retirement accounts.
Economic data looks okay.
July PMIs continue to suggest a solid take-off point for growth in the third quarter, broadly speaking.
In the euro area, the final July PMIs showed a rebound was in effect and China’s manufacturing numbers and the U.S. ISM surveys both surprised investors.
Combined with solid German factory orders and better-than-expected exports from China and Taiwan, a further recovery in global manufacturing and international trade is expected by market consensus in the third quarter.
This week, new Chinese data on credit, industrial production and investment could further fill in the picture of China’s post-pandemic recovery.
“This week’s retail July sales data for the U.S. and China will be important to watch,” says Christian Keller, economist for Barlcays in London .
Wall Street hopes this week is as good as last week when it comes to recovery news. Last week’s better-than-expected U.S. job claims and nonfarm payroll figures gave everyone a reason to stay bullish. But the risk of new layoffs is plausible, especially in states that have either added restrictions to businesses, like New Jersey and Rhode Island, or finding out that mandatory mask use is a buzz kill keeping people away from traditional activities. The employment outlook in the U.S. will be one of main drivers of consumer confidence not only here, but in the region as the rest of the Americas starts to see light at the end of the tunnel.