Changing reactions

Posted by: Paul Donovan

18 Jun 2020

Daily update

  • Markets are nervous about reports of rising numbers of virus cases. Increased testing may be part of this, but rising hospitalization rates (e.g., in Texas) are troubling. However, converting case numbers into an economic reaction is not straightforward. Markets are too keen to draw straight line comparisons with the virus earlier this year.
  • It seems that fear of the virus is less now than it was in March. Economic policy responses to virus cases are also less aggressive (so far). This suggests that we should look at economic data more than case numbers in assessing economic risks. The problem is that economic data is terrible quality at the moment, and financial markets crave novelty – which gives case numbers more importance in markets than they deserve.
  • The Bank of England gives its policy decision today. We think it very unlikely that the Bank will consider taxing savers and financial institutions with negative rates – it would hardly be helpful. Instead, there should be some expansion of the bond-buying program.
  • The US Philly Fed business sentiment opinion poll can be ignored as meaningless noise. The jobless claims data will get more attention. Continuing claims may be more in focus, given problems with the quality of the monthly employment report.

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