Two Competing Covid Narratives

July 15, 2020

As is the case on so many matters, faith and reason are clashing in how psychology is being affected by the coronavirus news. This week at least, faith — in this case optimism generated by favorable reports regarding a British vaccine in testing — is overriding the reality of accelerating trends in the virus’ spread in several countries. In the United States, a record 67.3k new cases were identified in the past 24 hours, and some 900 victims have died from the disease.

Share prices extended this week’s rally, and the dollar, which benefits from safe haven demand in times of fear and uncertainty, lost value this Wednesday.

Stock markets rose 1.6% in Japan, 1.9% in Australia, 1.1% in Singapore, 1.0% in New Zealand and 0.8% in South Korea, and bourses in the U.K., Italy, Spain, Germany, Switzerland and France are currently showing gains so far today that range between 1.6% and 2.4%. One exception to this pattern was a 1.6% slide in China’s Shanghai Composite index.

The euro has climbed 0.4% against the dollar to a four month and one week high. The U.S. currency has also declined 0.4% against the yen and loonie and is showing even larger overnight losses of 0.7% versus the peso and Australian dollar and 0.6% relative to sterling.

Ten-year U.S. Treasury, British gilt and German bund yields increased by 2, 3, and 1 basis points today.

The price of West Texas Intermediate oil advanced 1.4%, while that of gold dipped 0.3%.

The metrics of the Bank of Japan’s quantitative and qualitative easing with yield curve control were not changed at the latest monetary policy review.¬† Since September 2016, the short-term policy rate target has been -0.1%, and the target for the 10-year JGB yield has been around zero percent. The BOJ continues to inject liquidity on a massive scale¬† through purchases of government debt, ETFs, J-REITs, corporate bonds, and commercial paper. There is also a special program to support financing in response to the novel coronavirus (COVID-19).

This week’s BOJ policy review coincided with a quarterly update of the Outlook for Economic Growth and Prices in which projected growth and inflation in fiscal 2020 were revised downward to -4.7% and -0.6%, respectively. “The pace of improvement is expected to be only moderate while the impact of COVID-19 remains worldwide. Thereafter, as the impact subsides globally, the economy is projected to keep improving further with overseas economies returning to a steady growth path.” The somewhat dubious assumption is made that a second wave of the coronavirus doesn’t occur, and in any case officials concede that the balance of risks surrounding their baseline growth and inflation forecasts is tilted downward.

Price data released this Wednesday show

  • A 0.1 percentage point uptick in British CPI inflation to 0.6% in June, which is still only a third as high as February’s 1.7% pace.
  • British producer output and producer input prices in June were 0.8% and 5.4% below their year-earlier levels.
  • Italian consumer prices in June were 0.2% below their year-earlier level. That matched May’s 12-month decline, which had been the first sub-zero observation since October 2016.
  • South Korean import and export prices last month were 7.3% and 6.0% lower than June 2019 levels.
  • South African consumer prices dropped 0.6% on month and 2.1% on year in May. That was the lowest on-year comparison since 2004.
  • U.S. import prices leaped 1.4% on month due to a 21.9% upsurge in fuel costs. Even so, import prices posted a 3.8% year-on-year drop with fuel slumping 36.4% and nonfuel costs dropping by 0.2%.
  • Polish CPI inflation accelerated 0.4 percentage points to an as-expected 3.3% in June.
  • Danish producer prices were 1.6% lower in June 2020 than in June 2019.

South Korea’s unemployment rate surprisingly dipped 0.2 percentage points to a 2-month low of 4.3% in June, and that economy’s trade surplus in the first half of 2020 of $11.03 billion was 40.6% narrower than the first half 2019 surplus.

New home sales in Australia shot up 87.2% in June as Covid restraints on activity were loosened. But Australia’s rising tide of coronavirus infections hit consumer confidence in July, which according to the monthly Westpac index of sentiment dropped 6.1%. That was the first decline in three months.

Belgian construction output posted a fourth straight year-on-year decline in May, but the drop of 9.5% was considerably smaller than April’s plunge of 39%.

In Canada, manufacturing sales recovered 10.7% in May after dives of 9.8% in March and a record 27.9%. Compared to May 2019 levels, factory sales and orders were 31.6% and 36.3% lower. The Bank of Canada is holding a policy review today. The decision is due within the hour and not expected to involve a rate change, but the release of an updated quarterly Monetary Policy Report will draw interest.

The Empire State manufacturing index leaped 17.4 points to +17.2. This was the first indication of rising factory sector activity in the New York area since January. At the low point in March, the index had a reading of minus 78.2.

Just in: Monthly rises in June of 5.4% and 7.2% in U.S. industrial production and factory output surpassed analyst expectations. Those were the second set of increases in a row but still left IP and manufacturing output 10.8% and 11.2% below their year-earlier level. Moreover, doubt is growing that the recovery will be sustainable in light of resurging Covid-19 cases. Overall capacity utilization in June of 68.6% remained will under 76.9% in the first two months of 2020.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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