Fathom Recovery Watch – 17.07.2020

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Headlines

• US sees a record number of new cases, driven by the southern states, as some parts of Europe also suffer new outbreaks
• China’s economy has an incredibly good second quarter
• Reports suggest the Oxford vaccine provokes a significant immune response on two fronts

On Thursday the US reported a record 71,299 new cases of COVID-19. These are shocking figures. It is important nonetheless to recognise that this is not a second wave, but a rippling out of the first one. US states that had seen very few cases through March, April and May are now bearing the brunt of these new infections. As we argued in a recent Fathom the Forecast, the rate at which COVID-19 spreads through a particular location tends to fall as the number of cases per capita in that location rises. This is true across the world as a whole, across US states, and as the chart below illustrates, across 51 countries in Europe. Kosovo, Luxembourg and Macedonia, which are all now seeing the largest outbreaks, had previously suffered relatively low rates of mortality.

We cannot be certain why the rate at which the disease spreads appears to slow as mortality rises: it may be that people fail to take sufficient precautions until their own country or region has suffered a big outbreak; it may be that ‘high R’ individuals, with big networks, catch it first, dragging down the average R once they are no longer susceptible; and it may be that rising immunity is playing a part too — an article in our reading list reaches precisely this conclusion. The fact that we are seeing large outbreaks in parts of Europe that had previously seen relatively few cases suggests the apparent containment of the disease in other parts of the continent that have started to reopen is not just a consequence of the warmer weather.

Our central scenario remains, by a narrow margin, a broadly V-shaped recovery for the world as a whole, with global output returning to pre-COVID levels around the middle of next year. Recovery paths will, of course, vary substantially across countries. The level of fiscal support will be important, but so too will the degree of confidence among individuals that it is safe to return to familiar, yet potentially risky activities, such as eating out. Data from OpenTable show that seat occupancy in restaurants has returned more or less to pre-COVID levels in Australia, Germany and Ireland. In the UK, where parts of the hospitality industry have been open for close to two weeks, restaurant bookings remain some 50% below normal levels. In many US states, restaurant bookings are starting to fall again as cases rise.

China was the first economy to impose severe restrictions on the movement of its people, and the first to reopen. According to data published earlier this week, China’s economy expanded by a staggering 11.5% in Q2, after contracting by 10.0% in Q1. Officially, China has already returned to pre-crisis levels of economic activity. As regular readers will be aware, we have long been sceptical about the accuracy of China’s official statistics. We find it hard to take this week’s data at face value. With China’s benchmark equity indices falling as the data were published, it appears that investors too have their doubts, either about the veracity of the GDP data, or about the lopsided nature of China’s apparent recovery, with growth reportedly driven by manufacturing rather than consumer-facing service industries.

This week has seen positive news on the vaccine front, with reports that the Oxford vaccine, thought to be several months ahead of its nearest competitor on the testing front, was able to provoke a significant immune response in 1000 British individuals who were inoculated back in April. According to an article in the Daily Telegraph, it appears to offer ‘double protection’, causing those receiving the vaccine to produce both antibodies and T-cells, with the latter thought to provide a more enduring measure of protection. The vaccine is already in production, and may be available in limited numbers within two months if it receives government approval. Global equity benchmarks have rallied this week as a result, with the S&P 500 at times showing positive returns year to date. While a V-shaped recovery remains our central scenario, equity investors continue to underprice the magnitude of the downside risks to activity.

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Gold has performed well through the COVID-19 crisis, returning some 20% year to date. Since the early 1970s there have been two major spikes in the real price of gold. The first was almost certainly a consequence of rising inflation uncertainty, as convertibility of the US dollar came to an end. The second, which began in the early 2000s is ongoing. Gold bugs might argue that it again reflects fears about currency debasement. But that does not fit with measures of inflation expectations, such as inflation breakevens, which remain well contained. A more plausible explanation is the steady decline in the real risk-free rate, driven in part by QE, which has pushed all asset prices higher. If we look at data back to the 1830s, the real price of gold appears to mean revert. But mean reversion is slow. On average it takes close to five years for the real gold price to move just halfway back to its long-term average. And if a slower-than-expected recovery from the economic consequences of COVID-19 pushes government debt higher and real yields lower, while causing some to worry even more about currency debasement, it may yet rise (much) further from here.

Interesting reading

• A preprint article that had found evidence of cross-immunity to SARS-Cov-2 from previous coronavirus infections has now been peer-reviewed and published in the journal Nature: https://www.nature.com/articles/s41586-020-2550-z
• The Daily Telegraph suggests there is evidence that the Oxford Vaccine, thought to be several months ahead of its nearest competitor, offers ‘double protection’ against COVID-19. An article is expected to be published in the medical journal The Lancet next week: https://www.telegraph.co.uk/news/2020/07/15/coronavirus-vaccine-breakthrough-oxford-scientists-discover/
• A group of academics from Oxford has made available a series of short talks about their research into COVID-19: https://www.research.ox.ac.uk/Article/2020-04-30-covid-conversations
• The St Louis Fed has produced a coincident employment index, which uses high-frequency data  to provide a gauge of US labour market conditions in real time. It paints a bleaker picture than the headline payrolls survey: https://www.stlouisfed.org/on-the-economy/2020/june/reading-labor-market-real-time
• Researchers at the University of Oxford develop a model in which a proportion of the population has innate resistance to SARS-Cov-2. In this world, they argue that some populations may already possess sufficient ‘herd immunity’ to avoid a second wave: https://www.medrxiv.org/content/10.1101/2020.07.15.20154294v1

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