As the COVID-19 crisis continues we are making adjustments to our publication schedule. Recovery Watch will be published three times a week. Please click here to subscribe to the newsletter or join Fathom’s regular Recovery Watch Forums and participate in lively discussions with our team and others in the community.
Next forum date: Monday 15 June 2020
Headlines
- US continuing claims remain above 20m; we expect payroll numbers later today to drop by -6.5m, more than the -2.8m suggested by the ADP data release this week
- Data on retail sales show that consumption has fallen drastically, but seems to have stabilised in April
- A drop in consumption has been associated with a sharp, synchronised, global consumer deleveraging, paving the way for pent-up demand to help shape a ‘V’ recovery
- As economies reopen, second waves have started to occur. Track and trace policies have proven again their ability to quash these relatively easily. The bottom line is that the virus can be managed, but the issue of how to do so is increasingly a political one
Among developed markets, the narrative is clearly shifting towards a gradual reopening as we slowly adapt to coping with the new post-COVID normal. In the UK a recent ONS survey showed that only 8% of companies returned to work over the two weeks between 4 and 17 May and about 25% of those that had paused activity were planning to restart over the next month (i.e. by about now).
Refresh this chart in your browser | Edit the chart in Datastream
Earlier this week, we also upgraded the chances of a V-shaped recovery in our central case scenario. Recent hard data has also started to improve, even if not yet as quickly as the latest trends in more timely mobility data.
In the US, jobless claims data released on Wednesday show that initial claims continued to drop to ‘just’ 1.9m people, although continuing claims actually increased to 21.5m. Separately, ADP reported significantly fewer jobs than expected dropping off American firms’ payrolls in May (-2.8m), although we expect new job losses which will be officially reported later today to potentially show a drop of -6.5m.
Refresh this chart in your browser | Edit the chart in Datastream
Consumption has arguably been the biggest casualty of the worldwide lockdowns. The latest figures from retail sales do not make for pretty reading, but they seem to have at least stabilised in April.
Refresh this chart in your browser | Edit the chart in Datastream
The glass-half-full view from the drop in consumption is that consumer savings seem to have gone up almost proportionally to the severity of the lockdown. Looking at some of the dramatic falls in consumer debt statistics across the world, the COVID-19 pandemic has all the hallmark of one great, orderly and synchronised global consumer deleveraging.
Refresh this chart in your browser | Edit the chart in Datastream
Such orderly deleveraging has been underpinned by swift and sizeable government interventions that have averted both corporate and consumer defaults and, therefore, reduced the risk of another financial crisis. So far so good and we applaud these efforts.
However, we have always contended that large government transfers underpinned by ultra loose monetary policy are not easily reversible and have real long-term costs for economies in terms of productivity, supply side and market distortions.
For now, investors across developed markets seem to be happy heaving a large sight of relief. As flagged in previous editions of Recovery Watch, equity indices have recovered most of their early losses and are now back towards their pre-COVID levels. Our own analysis suggests that this rebound has disproportionately favoured assets primarily exposed to policy measures aimed at bolstering liquidity (i.e. assets mimicking our FLiq measure), while assets with a more direct exposure to macroeconomic fundamentals (i.e assets mimicking our FLI measure) have seen only a more subdued rebound.
Refresh this chart in your browser | Edit the chart in Datastream
Assets in the latter category are increasingly looking attractive (contact us for more details on examples of such assets) given our renewed optimism about a V-shaped recovery. However, such optimism hinges on a number of assumptions and observations. First, the deleveraging in household balance sheets should quickly boost near-term consumption as consumers will reverse saving patterns in the face of ongoing cheap credit and abundant liquidity.
Consumer behaviour in markets has revealed the willingness of consumers to re-leverage. A number of brokerage houses in the US have witnessed a surge in new accounts allegedly seeking to reinvest some of the stimulus cheques received, a finding corroborated by a surge in search activity of the term ‘best stock broker’ around the time of the announcement of the ‘Economic Impact Payments’ stimulus.
Refresh this chart in your browser | Edit the chart in Datastream
More importantly, a V-shaped recovery chiefly requires having learned some key lessons as the risks of a second wave seem to have also risen over the past weeks. In the absence of a vaccine, the experiences of Korea, Taiwan and Japan unequivocally show that the quick and effective implementation of track-and-trace measures is significantly more effective and efficient than economy-wide shutdowns, but rely on a highly effective bureaucratic apparatus. Attitudes to the virus seem increasingly complacent and primarily based on reports that Wuhan has not seen any new meaningful increase in infections. Indeed, new lockdown measures have been reported in Northern China in late May and seemed to have normalised since. Korea has also recently successfully quashed new localised virus hotbeds.
The recent experience from Iran is far more sobering and perhaps more pertinent to much of the western world. It has been reported that, this past weekend, the Iranian government let all state employees back to work, allowed mosques to hold daily services and removed most restrictions on businesses. This was against healthcare advice and without a track-and-trace programme in place. As of Tuesday, the health ministry reported almost the same number of new infections as at the country’s peak in late March. Saudi Arabia could be another country to keep an eye on over the next weeks as it allowed mosques to reopen for daily services. Even Singapore, a model case in the early months of the outbreak and renowned for its efficient state machine, failed to fully appreciate some of the risks associated with normalising conditions. In particular, Singapore exposed the risks of cross-border movements of people (i.e. migrant workers) while the virus continues to spread in many parts of the world and without mass testing.
Equally importantly the recent experiences in Singapore and across Europe have highlighted how differences in the economic fabric of different countries are important determinants of a country’s susceptibility to the virus and the associated economic fallout. A recent report from the World Bank, for example, analyses differences across countries in the proportion of jobs that can be carried out from home. The spread between countries is striking as is the heterogeneity among European countries. It is also interesting to see how both the UK and the US do not feature anywhere near the top countries with a high share of jobs that could be performed from home. Yet, both have been among the more relaxed among developed markets in their efforts to curtail the virus.
Refresh this chart in your browser | Edit the chart in Datastream
Finally, the current epidemic has also brought to the fore deep divisions and pent-up tensions within the social fabric of many countries. Full scale lockdowns should be seen as regressive policies which have further exacerbated these tensions. Politically, policies such as universal basic income are likely to become more mainstream. More straightforwardly, we hope that politicians now understand that allowing a second wave and more economy-wide lockdowns could be deemed unforgivable and end their careers, particularly as the success in South Korea have become common knowledge.
Interesting reading
__________________________________________________________________________________
Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.
Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
