La casa mia

Posted by: Paul Donovan

10 Mar 2020
  • The Italian government decided to sort of shut down the country. This is less a supply shock – people can still go to work. This is more a demand shock. People are told to stay home. Italian services will be worst hit. There may be some demand substitution – no opera at La Scala, but binge watching "The Crown" on Netflix instead.
  • Supply and the demand shocks combine to do damage to company financials. Because of the importance of cashflow, small businesses are often said to be one bad month away from closing. This is a bad month, and will need targeted policy action. A general rate cut is not targeted action.
  • US President Trump announced hopes for a general payrolls tax cut and "very substantial relief" for businesses. There are no details. US equity futures are up, presumably relieved the administration is noticing the problem. Labor market changes mean a payroll tax cut has less impact in 2020 than in (say) 1950. A payroll tax cut may help the economy bounce back, but does less to limit the downside.
  • Chinese domestic consumer price inflation was as expected. UK retail sales were weaker than expected. French industrial production data will be ignored by investors.

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