Assets manager like PIMCO appear to be dipping their toes back into markets with an implicit assumption of a short sharp recession. Meanwhile, we have a slew of articles suggesting labour markets around the world could be in worse shape than many think, even in Japan.
On the policy front, we have an article that argues that the time has come to target nominal GDP, and another argues for helicopter money. On politics, economic indicators point to a Biden win over Trump, while China is using COVID to position itself as the new global leader.
Finally, in our latest COVID tracker, we compared Sweden to its neighbours and find that its performing poorly in terms of COVID death. We feature an article that supports this thesis.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Asset managers like PIMCO appear to be dipping their toes back into markets with an implicit assumption of a short sharp recession. Meanwhile, we have a slew of articles suggesting labour markets around the world could be in worse shape than many think, even in Japan.
On the policy front, we have an article that argues that the time has come to target nominal GDP, and another argues for helicopter money. On politics, economic indicators point to a Biden win over Trump, while China is using COVID to position itself as the new global leader.
In our latest COVID tracker, we compared Sweden to its neighbours and find that its performing poorly in terms of COVID death. We feature an article that supports this thesis.
Lastly, macro researcher Manan Shah drills down into quarterly GDP consensus forecasts for the major economies, with expectation for a strong bounce back in Q3.
Enjoy!
Bilal
Consensus GDP Tracker The IMF’s latest World Economic Outlook projects a 3% contraction in the global economy this year. This is an unprecedented decline and a 6.3pp downgrade from the January forecasts. A rebound to 5.8% growth is expected in 2021, assuming the policy support in place proves effective, but this still leaves a huge cumulative loss in global output…
(Manan Shah | 21st April, 2020)
Global COVID-19 Tracker: Is Sweden’s Lax Approach Working? We’ve now added more European countries to our tracker, especially since many like Denmark have started to re-open. We can now compare how the Nordic countries are faring. We know that Sweden was more lax than other countries – its deaths as a share of cases or case fatality rate (CFR) is 11%, which is on the high side (similar to France at 11% and Italy 13%)…
(Bilal Hafeez | 21st April, 2020)
How a U-shaped recovery will reliquify the markets and how J.P is allocating assets.
A Phased Market Recovery as Liquidity and Fundamentals Return (PIMCO, 14 min read) Forced selling has eased in high-quality segments of the bond market, such as U.S. Treasuries and U.S. agency mortgage bonds. Over time, other sectors will recover, but this depends on the trajectory of economic recovery. PIMCO sees deep but short-lived recession and a U-shaped recovery by the end of the year.
WHAT DOES COVID-19 MEAN FOR REAL ESTATE? (JPM, 2 min read) The U.S. office market will transition to flexible office spaces as employees will work from home. JP Morgan is also bullish industrial space relative to retail as they expect a sharper rise in e-commerce.
Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations (NBER, 33-page read) Study finds valuation gap for firms from developed markets increased by 31% after the GFC – a reversal of financial globalization – while the gap for firms from emerging markets (excluding China) stays stable.
No full-fledged defaults and how interest rates will remain lower for longer.
WHAT CDS MARKETS ARE DISCOUNTING (Variant Perception, 1 min read) CDS pricing could be reflecting the expectation that central banks will ultimately monetise recent fiscal stimulus. Hence, CDS pricing demonstrates the probability of a traditional credit event occurring (failure to redeem or pay coupons, debt restructuring ) rather than a full default.
Post‑Pandemic Interest Rates: Lower for Longer (Advisor Perspectives, 5 min read) A combination of a large private sector saving glut and implicit or explicit nominal yield curve control by central banks will keep interest rates lower even after the pandemic is over. The history of pandemics, interest rates over the past seven centuries and previous recessions all support this thesis.
Understanding Helicopter Money (MPRA, 7-page read) Article emphasises that helicopter money should be directed to affected firms to be more effective. This type of monetary policy should be avoided in normal times, but it might yield beneficial results in the current state of the European economy to stabilize unemployment rates in short-run.
Central Banks Can “Magically” Prevent Disinflation (Econ Lib, 6 min read) Article highlights how inflation in 2021 and 2022 is also likely to be weak and stand below 2%. Primarily due to the supply shock. NGDP level targeting or price level targeting (along a positive 2% trend line) should be adopted by the Fed to avoid deflation within the economy.
Three ways on how fiscal policy can help tackle COVID recession and how inequalities are reflected in illnesses.
The Three Ways Fiscal Policy Can be Used to Fight COVID-19 and the Coronavirus Recession (Washington Center for Equitable Growth, 5 min read) First, it can give the right incentives to firms, as well as funding for federal agencies, to produce tests, explore drugs, and develop vaccines. Second, disaster relief—aiding the people and businesses affected by the economic shutdown. Third, it can support help support aggregate demand.
The Coronavirus Pandemic Highlights the Importance of Disaggregating U.S. Data by Race and Ethnicity (Washington Center for Equitable Growth, 4 min read) Policymakers should pay special attention to how race and poverty creates disparities. The outcome of economic crisis, illness, and death affect some communities more than others, and current data does not adequately capture this.
Global labour market in grim condition.
Labor Markets During the COVID-19 Crisis: A Preliminary View (NBER, 6-page read) Study finds job loss has been significantly more substantial than implied by new unemployment claims with around 20 million lost jobs by April 6 (far more than jobs lost over the entire Great Recession). Second, many of those losing jobs are not actively looking to find new ones. Third, participation in the labour force has declined by 7% relative to the 3% cumulative decline that occurred from 2008 to 2016.
Japan’s Job Security Put to the Test (OMFIF, 3 min read) It is estimated that if the 30% decline in sales continues for more than six months, there will be no difference in the fall in cash reserves between global and Japanese companies. This could threaten the country’s corporate culture which usually protects workers from layoffs.
How Do We Think the COVID-19 Crisis Will Affect Our Careers (If Any Remain)? (IZA Institute of Labour Economics, 15-page read) Survey of Belgian employees reveal 21% of them fear losing their jobs due to the crisis—14% are concerned that they will even lose their jobs soon. Also, 26% expect to miss out on promotions. This fear of a negative impact is higher in vulnerable groups, such as migrants.
A global political crisis by the end of 2020 and how growth in trade reduces the probability of conflicts.
Preparing for the Crisis After the Crisis (ASPI, 6 min read) China is using the virus to position itself strategically by claiming that authoritarianism did a better job in beating the virus than Western democracy. This comes after its aggressive military positioning around Taiwan. There is a potential regional security risk brewing, which can lead to a global political crisis by year-end or early in 2021.
The Grim Truth About the “Swedish Model (Project Syndicate, 6 min read) Those inspired by the Swedish model of low-scale lockdown should understand that it comes with a higher death toll per capita basis (136 deaths/million people relative to 49 in Germany).
Atlantic Trade and the Decline of Conflict in Europe (VOX EU, 4 min read) This column examines the relationship between Atlantic trade and war in Europe between 1640 and 1896 (a period in which intra-European conflict decreased dramatically). It finds that the growth in Atlantic trade lowered the probability of intra-European conflict by 15%.
How space can provide useful hints and what’s the forecast for the 2020 Presidential election?
Monitoring the COVID-19 Crisis From Space (Sloan Review, 8 min read) Studies show light emissions can successfully quantify local economic activity, local levels of income, and electricity usage. These methods in real-time can track changes in economic activity, monitor conflicts and natural disasters. Impact of COVID on China was noticeable from Jan onward with these methods even before official lockdown.
Treasury Market Liquidity During the COVID-19 Crisis (Liberty Street Economics, 8 min read) Column compares market liquidity of treasury securities in March 2020 against the past fifteen years, (including 2007-09 financial crisis). Current bid-ask spreads were at their widest, order book depth was comparable to 2007-2009 period, price volatility was also higher and so was trading volume.
What the Index of Leading Indicators Tells Us About the 2020 Presidential Election (Angry bear, 2 min read) Column applies econometric techniques to predict 2020 election. In all of the recent head-to-head match-ups with Joe Biden, Trump trails. Current Index of leading Indicators stands at -6.7% – this favours Biden.
China needs to look inwards and how the blame game will be detrimental for the recovery from the crisis.
Depression, and not Stagflation, Could Haunt China in 2020 (Brugel, 6 min read) Under plummeting external demand and deflationary pressures, China will need to rebalance the economy towards a consumption-based growth model quickly.
Blaming China Is a Dangerous Distraction (Project Syndicate, 7 min read) Avoid the blame game. Focus on more pertinent issues at hand. Development of vaccine, collective deployment of diagnostic and therapeutic tools to fight the crisis and putting the economy back on track should be the priority. And China can play a crucial role in all of this.
How unawareness is stopping sustainable investing and ESG outperformance.
EU picks BlackRock to advise on ESG integration for banking (1 min read, Financial Advisor) The advisory role of the firm might create a backlash, given that it is considered as one of the worst asset managers at climate engagement.
Investors Know Little About ESG Investing, and FAs Aren’t Helping (1 min read, Financial Advisor) Among investors who don’t engage in sustainable investing, 47% say a major factor is that they don’t know enough about it. But when presented with an explanation of sustainable investing, 52% of U.S. investors became interested.
ESG Ratings Could Predict Outperformers (Morning Star, 4 min read) S&P 500 plunged 26.9% between February 19 and March 26, companies with a high Fidelity ESG rating (those rated A or B) outperformed. while those measured C to E endured more significant falls relative to the S&P.
(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.)