Global Economy & Markets Weekly Roundup 28/07/20

A new sizable US fiscal stimulus package is underway, albeit with less generous benefits for the unemployed
             
Key Takeaways
 
Fresh fiscal stimulus is underway in the US on top of circa $2.5 trillion (12% of GDP) measures since March. US Republicans unveiled a package of $1 trillion (5% of US GDP). Key takeaways are: i) another round of direct $1,200 per US household; ii) the Federal Pandemic Unemployment Compensation, which is set to expire on July 31st, would be extended for two months, albeit at a lower level of $200 per week (on top of regular unemployment benefits) instead of $600 per week in order to limit disincentives to return to work; iii) a new round of forgivable loans to small businesses (Paycheck Protection Programme) alongside incentives for employers to rehire staff and; iv) $105 billion in school funding. In addition, an extension of the residential evictions moratorium for non-payment of rents is also likely. Looking forward, negotiations in the US legislature continue, aiming to conclude by the end of next week.

Fiscal acts have been pivotal in supporting the economy through the pandemic, with the aforementioned relief checks playing a key role. Indeed, households’ personal income was up by 7% yoy in May, with Government transfers representing circa 30% of total personal income in April and May, on average. Combined with consumer spending being deferred during the lockdown period, (i.e. from late March to early May), the households’ savings ratio remains exceptionally high at 23.2% (May), a development that could provide significant support to private consumption in the short term. Note that the advance estimate for Q2 GDP is due on July 30th, with Atlanta Fed’s GDP Nowcast model pointing to -34.3% qoq saar (-10.2% yoy), albeit with the sequential path for economic activity improving sharply during May and June.  

Regarding US monetary policy, no changes are anticipated at the forthcoming Fed meeting (July 28-29). Attention will gradually turn to the ongoing monetary policy framework review. Regarding strategy, the adaptation of an average inflation targeting framework appears the most likely outcome. The Fed will likely seek to achieve inflation of 2%, on average, during the business cycle, suggesting that periods of inflation below 2% will be offset by periods with inflation above 2%. Effectively, such a policy would corroborate the view for no increases in the federal funds rate in the foreseeable future as inflation would need to exceed 2.5% yoy on a sustainable basis before monetary policy tightening takes place.

Global equities have moved sideways recently. Investors seek direction, with renewed fiscal stimulus plans, some promising developments in the corovavirus medical field and better-than-expected corporate results in Q2 providing support (see markets section). On the other hand, escalating US-China tensions and the ongoing deterioration in epidemiological data, especially in the US, and its potential to stem (or even halt) the economic recovery, weighed on risk appetite. Note that the improvement in mobility indicators has abated lately, after recovering sharply since May (see graph below). Overall, the MSCI ACWI was largely stable on a weekly basis (-3% YtD), with the EUR appreciating to its highest level since September 2018 against the US Dollar (+2.5% to $1.17) due to positive political developments in the euro area (Next Generation EU (NGEU) with EUR 390 billion in grants and EUR 360 billion in loans).

Note that the grants’ component of the NGEU favors the poorest countries (Bulgaria, Croatia) and/or those experiencing high unemployment rates (Greece) during the 2015-2019 period. On the other hand, high-income countries experiencing below EU 2015-2019 average (8.3%) unemployment rates are net contributors to the fund (Germany, The Netherlands, Ireland and others). Note that Ireland, although among the economies hardest hit by the 2007/8 economic and property market crisis, has rebounded dynamically due to: i) a supportive (tax) environment for Technology multinationals and high-growth start-ups; ii) strong domestic demand; and iii) a high-skilled labor force.