Macro Hive: Super Tuesday Special + COVID Update + Top Blog Picks

Given the sharp rally in markets and potential co-ordinated policy response – the Fed just cut rates as did Australia and Malaysia earlier today – we feature Dominique Dwor-Frecaut’s latest take on whether the rally will last. I provide an update of my COVID tracker and include some new analysis on how much cases could be under-reported in US and Europe.

Also given it is Super Tuesday in the Democratic primaries, we feature an Exclusive by macro strategist, John Tierney, on the volatile state of front-runners. I update our election tracker with the candidate odds of winning each of the states tonight.

Then, we have our usual Top Blog Picks. Naturally they are dominated by virus analysis. Oxford professor Simon Wren Lewis blog is well worth a read. He discusses the demand-side shock from pandemics. A new paper by Virginia Tech models the global impact of the virus which is well argued. Away from the virus we feature Philip Lane on monetary policy in a low rates environment and how business cycles have contributed to widening income and wealth inequality.

Enjoy!

Bilal

• Crucially, the virus is reaching more countries. 16 new countries have reported their first cases over the past week. These countries range from Mexico to Qatar to Indonesia. Some major countries have yet to report case – these include Turkey, South Africa and Colombia.

(Bilal Hafeez | 3rd March, 2020)

A timely estimate on the economic impact plus scenarios for further disruption

The Economic Effects of a Pandemic (Mainly Macro, 6 min read) The direct economic impact from a pandemic is a few percentage points hit to quarterly GDP, which if combined with a 4-week school closure is around 3 times as large. The larger impact comes from reduced social consumption as, unlikely the supply hit, this is a permanent loss.

How Much of China and World GDP Has The Coronavirus Reduced? (Virginia Tech, 16 page read) COVID-19 has so far caused a 4% output loss for China and 1% globally with around 40% of the loss from indirect supply chain disruption.

The Two Dark Sides of COVID-19 (Project Syndicate, 4 min read) Given Wuhan’s wet-market is the likely source of COVID-19 such markets should be shut down globally to prevent other similar diseases from occurring.

Analysing the fastest market correction in history

Should I Be Concerned About The Correction In U.S. Equities? (JPMorgan AM, 2 min read) Corporate profits will be hit harder than the wider economy from COVID-19 given the S&P500’s reliance on overseas revenues and international supply chains. With valuations now less stretched investors looking to add risk may see this as a good buying opportunity.

What Happens to Stocks After a Big Down Month? (Advisor Perspectives, 2 min read) Equities rebounded within a one-year horizon more than 50% of the time following previous months of large loses and by nearly 75% of the time three-years later. Most of the outliers were around the Great Depression.

Market Correction: What Does It Mean? (Advisor Perspectives, 3 min read) Only four of the 22 market corrections since 1974 have turned into bear markets, and even when bear markets have occurred they have lasted around 17 months on average.

Lane on monetary policy under low rates and core PCE versus core CPI

Philip R Lane: Monetary Policy, Low Interest Rates and Low Inflation (BIS, 4 min read) Incremental, sustained easing is needed in a low interest rate environment while pre-emptive easing can also act against an engrained downward shift in inflation expectations. Fiscal policy is a powerful tool in this lower-for-longer environment.

Two Measures of Inflation and Fed Policy (Advisor Perspectives, 3 min read) The more stable measure of core PCE explains why it is the Fed’s preferred measure of inflation, but its disinflationary trend (currently at a below-target 1.63%) suggests Fed policy has not been effective.

How business cycles impact inequality plus evidence on basic income schemes

Shocks, Frictions, and Inequality in US Business Cycles (VoxEU, 7 min read) Business cycles, and the associated policy response, account for half of the increase in US wealth inequality between 1980 and 2015 and almost all of the increase in income inequality. More expansionary fiscal policy following the financial crisis would have lowered wealth inequality.

Is Basic Income a Good Idea? Here’s What the Evidence From Around the World Says (The Conversation, 4 min read) A review of studies on past basic income schemes in North America shows reduced working by women and single parents but little change for men. Health outcomes were little changed.

Peak supply chain disruption imminent plus PIMCO on why it gets worse before it gets better

How Coronavirus Could Impact the Global Supply Chain by Mid-March (Harvard Business Review, 4 min read) Peak supply disruption from COVID-19 is likely by mid’ March as the pre-Chinese New Year manufacturing shipments arrived in the US/Europe in late February.

COVID‑19: Repercussions Could Worsen Before They Improve (PIMCO Blog, 3 min read) As a combined demand and supply shock COVID-19 will cause a meaningful, but temporary, hit to economic growth. The Fed will likely cut rates by 50bps to counteract the tightening in financial conditions, the ECB may cut too.

A Pandemic of Deglobalization? (Project Syndicate, 4 min read) COVID-19 could reinforce the deglobalisation trend already underway, reminiscent of how the Black Death in Europe brought an end to the Middle Ages.

US media treating Sanders like Trump in 2016 and how COVID-19 is immune to spin

The One Way Sanders is the New Trump (Colombia Journalism Review, 4 min read) Rather than focusing on what Bernie Sanders’ rising popularity tells us about American voters US journalism is once again dismissing the front runner in a similar way to Trump in 2016.

The Coronavirus and How Political Spin Has Worsened Epidemics (New Yorker, 6 min read) Suppressions of information has, throughout history, worsened pandemics and hindered the response. How the Trump administration manages the coronavirus will be a key test of how it functions after three years of downsizing and dismissing the importance of experts.

Modelling market-implied RWA and yield curve inversion under an accommodative policy stance

Variability in Risk-weighted Assets: What Does the Market Think? (BIS, 55 page read) A new measure of market-implied RWA shows significant differences in RWA between banks / countries prior to 2016 due to; shares of less transparent assets, capital constraints and country-specific factors. Basel III reforms have reduced the RWA variability.

Predicting Recessions Using the Yield Curve: The Role of the Stance of Monetary Policy (Boston Fed, 18 page read) Yield curve inversion during a period of “unusually accommodative” monetary policy such as Q3 2019 overstates the likelihood of recession.

Why China can avoid a permanent hit from the coronavirus plus a first look at China’s status as a global creditor

Can China’s Economy Withstand the Coronavirus? (Project Syndicate, 4 min read) Economic cost of COVID-19 will be substantial yet transitory. Disruption may last into Q3 but any permanent hit from widespread business failures, weak investment and rising unemployment is unlikely. China’s reduce trade dependency and a large digital economy also provide important buffers.

How Much Money Does the World Owe China? (Harvard Business Review, 6 min read) China is now the world’s largest official creditor with more than 5% of global GDP outstanding. But with no official data on Chinese overseas lending this “hidden debt” complicates assessment of financial risks in debtor countries.

How to model carbon pricing and Apple investors vote against ESG-linked comp

The True Price of Carbon (Project Syndicate, 4 min read) By treating carbon as an asset (with an increasingly negative payoff) and treating the discount rate as an output, a new carbon-economic model suggests a carbon price of at least $100 per ton.

Apple Investors Say No to ESG-comp Proposal (Corporate Secretary, 4 min read) Apple

shareholders voted resoundingly against a proposal to link executive pay directly to ESG metrics at the recent AGM. The Board had recommended the proposal be voted against on the basis it already issues annual supplier and environmental responsibility reports.

Catching The First U.S. Wave Of ESG Investment: Lessons Learned And Challenges Ahead (Jones Day, 2 min read) A drive for innovation, greater need for public-private partnerships, too much focus on limitations from unstandardized ESG metrics and a clash with passive investing are the main trend in the fast-growing ESG investment.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)