There are increasing signs that the resurgence of COVID-19 cases is weighing on the US economy. No reaction is expected from the Federal Reserve this month beyond the extension of emergency lending measures through year-end 2020. The rally in the price of gold reflects concerns about risks of fiat currency devaluation.
Over the last week, the global case count has surged past 16.5 million and the death toll now stands at above 660 000. However, these numbers paint an incomplete picture of the diverse evolution of the spread across countries and regions.
The virus has given the complacent a timely reminder of the complexity of keeping an infectious disease under control in the absence of draconian social distancing, with flare-ups in a number of countries.
Spain in particular is back in the focus, with outbreaks in a number of regions and cases rising above 1 500 for the past seven days. In response, the government has mandated facemasks to be worn everywhere and in the worst-hit areas, partial lockdowns are being reinstated. However, the problems are not confined to Spain. Last week, Germany reported 815 new confirmed cases on a single day, the largest daily increase since mid-May, and in France, the weekly caseload is up by 40% on the previous reading.
Meanwhile in north Asia, Hong Kong set yet another daily record with 133 new cases, while hospital beds inched closer to maximum capacity. Japan’s ‘second wave’ has now surpassed April’s peak with 700 new daily cases reported nationwide over the past week. Similarly, Australia’s cases are about to surpass the March peak with the second-most populous state, Victoria, recording 459 cases on Sunday.
It’s back to the future in the US where the picture continues to look a lot like April’s. The data gives the impression that cases are levelling off, but with significant delays in processing tests, that conclusion may be premature. Indeed, a former director of the US Centre for Disease Control (CDC) described the total number of tests being conducted as a ‘useless number’, arguing that the relevant statistic was the number of tests that delivered results within 48 hours.
The trajectory of the virus will inevitably take its toll on economic activity whether the authorities reinstate lock-downs or not because people will choose to retreat from public spaces. High-frequency indicators of social mobility and economic activity in the US certainly reveal the signature of the virus. Spending in states where the virus is advancing is lagging behind spending in those where it is retreating. Indeed, Google’s COVID-19 Community Mobility Reports data confirms that population mobility in the US is now lagging behind big western European countries, exposing the myth that there is a trade-off between suppressing the disease and supporting the economy.
Data for the purchasing managers’ index (PMI), a widely watched set of business surveys, suggest Europe’s economic recovery from the coronavirus pandemic gathered pace. The latest surveys found significant improvements in activity in both the services and manufacturing sectors.
The PMIs are back above 50, a reading that indicates a majority of businesses reported an expansion in activity compared with the previous month.
The eurozone composite (an average of the services and manufacturing sectors) PMI climbed from 48.5 in June to 54.8 in July with the services activity balance recording the strongest print in around two years.
In the US, the economic upturn seems to be losing momentum. While production is still expanding, a number of high-frequency indicators of consumer demand are flattening out or even falling again. The US will have to get back in control of the pandemic within the next two months for it to limit this to a temporary setback.
Any summer pause in the US recovery could be offset by stronger fiscal stimulus. The heightened concerns about the outlook for the economy mean it is probably even more likely than before that the new fiscal package, which US Congress will probably pass within 10 days, will go well beyond the USD 1 trillion which Republican leaders have proposed.
The July meeting of the Federal Open Markets Committee ends today. We expect no material changes to the fed funds rates, forward guidance, asset purchases or the statement language. Chair Powell is expected to reiterate a dovish economic outlook. This should support the low US real yields that have underpinned global asset markets.
A low-key FOMC meeting may pave the way for a more eventful meeting in September, at which the Fed is scheduled to release the conclusions of its framework review and associated strategy changes. This may result in the FOMC adopting an average inflation target and outcome-based forward guidance tied to this target. It still appears wary of yield curve control. It would likely require significant economic weakness for that to be adopted.
Gold prices reached record highs this week (see Exhibit 1 below), breaking through the previous high of USD 1,921/troy ounce set in 2011. Demand for the precious metal has increased this year, pushing up the price of gold by 25% since the start of 2020.
With the Great COVID-19 Recession seeing unprecedented joint monetary/fiscal stimulus programmes, there is a strong case for gold as a hedge against fiat currency devaluation and escalating political issues (e.g. US elections, US-China tensions).
Gold is a store of value. It offers investors no income, but that matters less in a world with more negative yielding fixed income instruments than ever before.
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