The inflation debate continues. Ahead of their forthcoming WEO update, the IMF add their expectation for only ‘small risks of spiralling inflation’; but OMFIF see things differently for the US. ECB chief economist Philip Lane reviews PEPP three months on and concludes it provided an important market stabilization role and, alongside other expansionary measures, allowed the ECB to ‘protect’ medium-term price stability.
We also feature Templeton on the bullish case for EM, Aberdeen Standard on why China will not drive the global recovery this time around, and former Australian PM Kevin Rudd on what China should do to achieve long-term sustainable growth. On politics, we feature financing developments in the Biden versus Trump campaigns and a take on Trump’s rather empty Tulsa rally.
Global COVID-19 Tracker – Religious Gatherings Leave Infection Risks Ahead In the DM world, we see Sweden leading today with a 5.2% increase. The US follows with a 1.4% increase, spread across 29 states and even in those circumstances most local officials still push for lifting restrictions. Denmark saw a 1% increase, catching the country roughly midpoint between its stage 3 and stage 4 easing of restrictions.
Franklin Templeton likes EM, and Charles Scwabs is cautious of duration risk
Jeremy Siegel on the COVID Stock Market (The Big Picture, 3 min read) The S&P overreacted to the COVID crisis according to Siegel, treating it as a replay of the 1918 Spanish Flu. If earnings drop to zero in 2020 and then revert to 2019 levels next year (assuming 20 P/E ratio), the stock market should have only lost 5-6%. He adds ‘75/25 is the new 60/40’ because low yields will end the bond bull market. [Bullish Equities, Bearish Bonds]
How Smart Manufacturing Could Lead to an Industrial Renaissance (Schroders, 8 min read) Smart manufacturing (i.e. 3D printing and robotics) will cause the next industrial revolution. Rising wages in China and ageing western societies will provide impetus to this trend. Environmental benefits and greater flexibility within supply chains are additional benefits. [Bullish Productivity / Growth]
Lockdowns Have Led to a Growth Surge for Digital Gaming (Invesco, 2 min read) COVID lockdowns have accelerated the growth of the global gaming industry, and Invesco expects this trend will remain even after economies re-open. [Bullish Tech]
The New Emerging Market Landscape: The Single Commodity Focus Has Shifted (Advisor Perspectives, 5 min read) EMs are no longer relying on single commodity exports according to Franklin Templeton. More diversified growth (technology and domestic consumption), increased value added, and more diversified supply chains post-COVID will all benefit EM. [Bullish EM]
2020 Mid-Year Outlook: Fixed Income (Advisor Perspectives, 10 min read) Charles Schwab favours ‘limiting duration to reduce the risk of rising long-term rates, and suggest[s] keeping the bulk of fixed-income investments in bonds with higher than average credit ratings.’ For investors concerned about inflation, they also see TIPS favourably. [Bearish Duration Risk]
ECB Chief economist on the success of PEPP, and Japan’s success with YCC
The Market Stabilisation Role of the Pandemic Emergency Purchase Programme (ECB Blog, 12 min read) ECB chief economist Philip Lane reviews 3 months of PEPP, concluding that this new programme provided an important market stabilization role. Q2 data are expected to show a reversal of the portfolio reallocation seen in Q1 when COVID fears triggered net selling of vulnerable country debt and net buying in those countries perceived as less vulnerable. [Bullish Euro Area Growth / Inflation]
What Price to Pay for Monetary Financing of Budget Deficits in the Euro Area (VoxEu, 18 min read) The monetisation of the deficit would be inflationary and pose legal challenges in the euro area. Nonetheless, this would be needed to avoid a ‘future sovereign debt crisis’. Additionally, the ECB is ‘one of the most independent central banks in the world’ and is equipped to prevent inflation from becoming a permanent fixture.
US Unprepared for Money Supply Boom (OMFIF, 4 min read) Over the past decade, money supply has been a ‘reliable indicator of demand and inflation’. With high money growth likely to persist and policymakers only focused on labour market aggregates (which is generating an opposite signal), the US ‘could find itself with high inflation’. [Bullish Inflation]
Japan’s Experience with Yield Curve Control (Liberty Street Economics, 9 min read) BOJ has achieved success in controlling the term structure of interest rates without having to engage in massive-scale interventions in the JGB market. Yield volatility was also much lower than Germany and the US. However, it failed to revive core inflation, and long-term inflation expectation also dropped.
ADB on globalisation and income inequality, and Mark Sobel on why US fiscal policy is contentious
US Fiscal Wrangling in Full Force (OMFIF, 3 min read) The US economic recovery and monetary policy are dependant on the degree of fiscal support offered, says Mark Sobel. He foresees fiscal debate in coming weeks becoming controversial as there are fundamental differences between Democrats and the Republicans on how best to use these packages.
New Index of Globalization: Measuring Impacts of Integration on Economic Growth and Income Inequality (ADB, 40-page read) ‘Between the two drivers of global economic integration, intraregional integration [regional] is far more important than extraregional integration. The analysis also shows extraregional integration turns out to be mainly responsible for the rise in income inequality.’ [Bearish Globalisation]
Gita Gopinath on COVID crisis, and why UK growth could face a double whammy
The Great Lockdown through a Global Lens (IMF Blog, 5 min read) Gita Gopinath highlights COVID’s protracted impact on the service sector as making this crisis very different to the earlier manufacturing-led downturns. Pent up demand could lead to a quicker recovery, but this is far from guaranteed given consumers may want to avoid social interaction. The Fund also expects lower inflation and inflation expectations. [Bearish Global Growth]
Covid-19 and Brexit: Contrasting Sectoral Impacts on the UK (VoxEu, 9 min read) ‘Analysing real-time business survey data from the UK, this column shows that sectoral impacts of Covid-19 and Brexit are very different. Sectors that have suffered less during the lockdown are the ones that are exposed to bigger negative impacts from Brexit [i.e. Agriculture, Manufacturing]’ [Bearish UK Growth]
Chicago Fed: ‘Index Suggests Economic Growth Increased Substantially in May’ (Advisor Perspectives, 3 min read) The National Activity Index (a composite of 85 monthly indicators) climbed +2.61 in May from –17.89 in April. This positive growth indicates above-average growth from its historical trend (zero value implies a historical average) in the US. [Bullish US Growth]
Trump fails to persuade followers in Tulsa, and Biden outraises Trump in May
Boris Johnson’s New-Model Colonial Policy (Project Syndicate, 7 min read) The decision to combine the Department for International Development (DfID) with the Foreign and Commonwealth Office in the UK will reduce development assistance to developing countries (who need the most support during the COVID crisis). This will, in turn, hurt Britain’s ‘soft power’ and ‘moral standing’ globally.
Where Was the ‘Silent Majority’? (The Atlantic, 5 min read) The underwhelming crowd at Tulsa (which traditionally has large Trump support) shows Trump has failed to persuade people to follow his lead. [Bearish Trump]
What We Learned About Biden and Trump From Their Latest Fundraising Numbers (Politico, 8 min read) Biden outraises Trump in May with $80.8 million (vs $74 million for Trump). However, Biden still trails Trump in cash on hand ($122.2 million vs $265 million), which shows how much the candidate and committee can spend in total.
Credit cycles as a predictor of financial crisis, and BIS on US dollar funding
Predictable Financial Crises (NBER, 32 page read) Financial crises can be predicted by analysing boom-bust credit cycles. Utilising historical data on post-war financial crises, the paper found that rapid credit and asset growth in the nonfinancial business or household sector results in a 40% probability of entering a financial crisis in the next three years.
The Political Scar of Epidemics (NBER, 33 pages) Generation Z is most likely to lose confidence in political institutions and trust in political leadership during epidemics. The loss in political confidence for residents is more substantial and lasting in democratic countries relative to autocracies.
US Dollar Funding: an International Perspective (BIS, 53-page read) The USD as a global currency results in ‘economies of scale and network effects, which reduce the costs of transferring capital and risks around the financial system. But it can also lead to vulnerabilities, as the resulting interconnectedness can transmit and amplify shocks that emanate from the United States’.
Unmasked! The Effect of Face Masks on the Spread of COVID-19 (VoxEu, 8 min read) Wearing facemasks decreased the growth rate of COVID cases by about 40% in regions of Germany that made wearing a face mask a requirement before other areas adopted this.
Aberdeen Standard on Chinese policy support, and Javier Solana on why US-China should avoid cold war mentality
COVID-19: Putting the Chinese Policy Reaction into Context (VoxEu, 9 min read) According to Aberdeen Standard Investments, China has deployed only 40% of policy levers (credit and fiscal) compared with the GFC and in contrast to many other economies were far less aggressive. As a result, Chinese policy will not drive the global economy forward as much as it did after GFC.
China’s Economic Crossroads (Project Syndicate, 6 min read) Kevin Rudd and Daniel Rosen believe that, due to massive debt levels, China cannot pursue stimulus at the same scale as it did in 2008. To counter these limitations, they have announced a plan to allow ‘market-based allocation of factors of production’. But we should see these policies with scepticism: back in 2013 it failed on its market liberalisation promises.
Averting a Cold War of Choice (Project Syndicate, 8 min read) Javier Solana and Oscar Fernandez believe US-China rivalry can avoid evolving into a ‘cold-war mentality’. This mentality would not help the world cope with COVID or climate challenges. This ‘cold war’ is a war of ‘choice’ and not ‘necessity’.
BlackRock quantifies positive externalities of Green Bonds, and William Blair sees the accelerating ESG adoption globally
The Race to Zero (BlackRock,6 min read) A hypothetical portfolio tracks the Bloomberg Barclays Global Green Bond Index with $1mn invested. It is shown to have a favourable impact on renewable energy generated (1073 MWh/year), water-savings (441m3/year), emissions avoided (1843 tco2 / year), preservation of land (38 hectares) and other benefits.
Mind your ES and G.’s (Wells Fargo Asset Management, 5 min read) ‘Global industry factors can typically explain about 15% of the variation in stock returns. In March 2020, ESG factors continued to have the ability to explain returns, and the explanatory power increased from its historical average of 5.8% to 10.1%’.
COVID-19 Drives ESG Demand (William Blair, 5 min read) William Blair sees ESG integration in equity and fixed-income portfolio continuing to grow. These trends will go beyond Europe because society has become more sensitive to how companies treat their employees, customers, suppliers and community (healthcare support) amid the COVID crisis.
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