Economic Update: October 2020

SUMMARY

ECONOMIC DRIVERS

In the US: Rates unchanged, new fiscal stimulus expected post-election

• The Fed’s position on rates and the view of the economy was little changed at their first meeting following October. The minutes released in October from their previous meeting showed that Reserve officials were concerned regarding lack of continued fiscal support and would commit to low rates until inflation averaged at least over 2%. As previously reported, for example, despite a handful of positive jobless claims reports, unemployment has not significantly improved, nor is it expected to in the coming month until material changes occur with regard to Covid-19. There are still over 30 million people unemployed and not looking for work and there are many people left unable to pay bills and rent without targeted fiscal stimulus as support before year-end.
• Volatility spiked to above 40 in the last week of October (i.e. per the VIX, a key indicator of uncertainty sometimes referred to as the “fear index”). This is the third time this year it reached this level (once in March at the depth of the market crash and again in June with a surge in Covid-19 cases and escalating Trump-China rhetoric). As mentioned above, in October the higher VIX was due to uncertainty around the upcoming Presidential Election, as well the failure of additional fiscal stimulus to be passed.
• As previously reported: a staggering amount of support has been deployed by the Fed in 2020, which includes aggressive emergency cuts to rates in March as well as a slew of additional policy measures, with similar action being taken around the world in developed economies in response to COVID-19. Following regulation changes the Fed has also launched Money Market Mutual Fund Liquidity Facility (MMLF) and MLF, The Pay check Protection Program Lending Facility (PPPLF), the Commercial Paper Funding Facility (CPFF), the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), the latter of which is a major step toward avoiding a financial contagion that spreads to the corporate bond markets.
• Regarding fiscal measures this year, the lawmakers failed to come to agreement before the election and although previous measure were substantial, more is needed before the year end. As previously reported for 2020: Trump signed four executive orders (10^th of August) that access FEMA funds to provide emergency funds for the unemployed, to defer tax payments for those earning less than 100K and to provide assistance to home owners and renters. On the 5^th of June several changes to the Paycheck Protection Program (PPP) Act came into law, which has had the effect of easing payroll demands and gives loan forgiveness further than previously set out in April. As previously reported “Phase 3.5” of COVID related fiscal stimulus was enacted on the 24^th of April to direct 484B toward funding hospitals and Covid-19 testing. Also as previously reported: a “Phase One” 8.3B spending bill was passed on the 6^th of March, which included funding for vaccine research, and assigned money to state and local governments. On the 13^th of March, Trump declared a “state of emergency” to free up 50B in spending. On the 18^th of March “Phase Two” took the form of a stimulus bill that included free virus testing, expanded unemployment benefits and healthcare funding. “Phase Three” also known as the “CARES Act” was passed on the 25^th of March, which include 2 trillion in spending and included 300B in direct payments to earners under 75K p.a., 500B in government lending to companies impacted by the crisis, 367B in small business loans, 250B in unemployment insurance, 220B in tax cuts as well as a smaller amounts to support state governments and healthcare.

In China: recovery still underway but at slightly slower pace.

• China’s PMI fell very slightly in October to 51.4 indicating that the recovery is continuing but at a slower pace. As previously reported: the manufacturing and services as indicated by PMI and non-manufacturing PMI being 51.5 and 55.9 respectively in September. Inflation (CPI ad PPI) was also down slightly in October).
• Regarding fiscal stimulus, as previously reports: In May, China announced fiscal stimulus, which was significant at US $500B (3.6T Yuan), but still less than many other countries hit by COVID. Furthermore, the issue of 1T Yuan worth of special treasury bonds was announced (a measure not seen since 2007). The special bond quote for infrastructure was also increased from 1.6T to 3.75T yuan.
• According to the IMF, further to the above, around US 360B in fiscal support measures have been announced in China which is to include social security tax relief, increased unemployment payments, production of medical equipment and to increase spending related to controlling COVID-19.
• As previously reported, the Peoples Bank of China (PBOC) reduced bank reserve requirement further following its action in March (freeing 79B). Also, to-date, as reported previously, the PBOC deployed 174B in reverse repo operations on February 3 (i.e. very short-term loans to banks so they remain stable and able to meet cash requirements. This was followed by an additional 71B on February 4. They also cut their medium term rates by 0.1% on the 16^th of Feb.

In Australia: RBA rate reduction and stimulatory Federal Government Budget

• The RBA left rates unchanged on the 6^th of October, however, they reduced from 0.25% down to 0.1% in the first week of November. Also on the 6^th of October the government released their annual budget in which a million fewer taxpayers were forecast to be resident by end of 2022. It was also assumed a vaccine would be in-hand by end of next year. A 50 billion dollar spend was outlined, for which some of the highlights included: “JobMaker” a hiring credit for employers taking on 16 to 35 year olds, higher training spend to support upskilling jobseekers, an additional 14B on infrastructure to name a few.
• Forward GDP estimates by the government are expected to be in the 4.25% range in 2021, with recovery beginning during the end of this year. As previously reported, Australia officially recorded its first recession in 28 years at the start of September, while quarterly GDP came in lower than economist estimates (est. -6% actual -7%) for the June quarter. A resurgence of Covid-19 cases in Victoria and NSW made a new peak at the start of August before trailing off since. The RBA are still supporting credit markets and expended the eligible collateral to investment grade securities.  Also as mentioned previously: the RBA cut rates twice in March, first on the 3^rd of March by 25bps down to 0.5 percent (after having left rates unchanged at 0.75% at the previous meeting). The on the 19^th of March the RBA cut by another 25bps to their current level at 0.25%. The RBA also committed to “market operations” i.e. the purchase of government bonds in the secondary market as well as additional repo operations.
• As previously reported, to-date, the fiscal response from the government targeted businesses and the newly unemployed. There are three stimulus packages to-date as well as 11.8B total in state-level packages. The first, a 17.6B package (12^th of March) that includes cash payments of $750 to welfare recipients as well as tax breaks for small businesses.  The business incentives include cash payments of between 2,000 and 25,000 to support hiring staff and paying wages. Further to this, 2.4B will be spent on health needs, including coronavirus clinics and other related expense needs as well as 1B to support the tourism sector. The second package on the 22^nd of March, was for 66B to include income support for workers (“jobseeker payments”) and small business loans. The third stimulus package on the 30^th of March of 130B to include $1,500 fortnightly payments to employers to pass on to employees to keep them in work.
• Further to the above, an additional phase of cash payments to low income households was announced in early July, which will deliver $750 cash to around 5 million Australians, which will total around 3.8 billion.