The elimination, and control, of COVID-19 is a long way off but market confidence is holding up amidst signs that nations are better managing the challenges of coronavirus
20 July 2020 | Shane Oliver, AMP Capital
The past week has seen some bad news in four key areas. First, it’s been more of the same with a continuing rise in new coronavirus cases with this being driven globally by emerging countries and the US among developed countries – where case growth remains strong in the south and west.
Several countries have also had “second waves”, including Japan and Israel. In Australia, Victoria has seen a continuing surge in new cases with fears about a spread to NSW. With more community transmission this time in Victoria (as opposed to returning travellers) it may take a bit longer for lockdowns to work this time around compared to March/April. Fortunately NSW seems to be keeping new cases down.
Second, the re-acceleration of coronavirus cases in several countries has seen reopening pause in the OECD (and reverse in some areas – notably California in the last week in relation to bars and restaurants) with speculation of further reversals to come, including in Victoria.
Third, the surge in coronavirus cases, the reversal of re-openings and the associated negative headlines is starting to impact confidence and economic activity with our weekly Economic Activity Trackers for the US and Australia faltering and losing some of their upward momentum over the last few weeks.
Finally, US/China tensions continued with the US rejecting China’s claims in the South China Sea and President Trump ending Hong Kong’s special trade status with the US and signing legislation to sanction Chinese officials repressing dissent in Hong Kong.
There has been some good news
First there have been more positive developments on the health front. Coming on the back of positive news about Remdesivir a week ago, Moderna reported that trials of its vaccine produced anti-bodies in all test patients and the University of Oxford’s vaccine was reported in Phase 1 trials to produce anti-bodies and “killer T-cells”.
The latter is significant because various studies suggest anti-bodies to coronavirus may not last more than a few months, whereas T-cells can remain for several years. This has led to firmer hopes of a vaccine by year end and as early as October.
Second, while hospitalisations and deaths are escalating in the US in response to its second wave both are continuing to run proportionally well below what was seen in the first wave. The fatality rate of new cases is still running around 1% compared to around 7% in April.
Third, several countries are continuing to successfully contain outbreaks with a combination of tracing, quarantining and quickly applied targeted lockdowns and social distancing – and so are learning to live with the virus. Several Asian countries stand out on this front – notably China, South Korea, Taiwan, Vietnam and Thailand. And so far, so good in Europe. This approach looks preferred in NSW (which is managing so far to keep new cases low) and Australia generally in preference to complete elimination and return to lockdowns.
While the news has been bleak in Australia over the last two weeks – new daily cases of around 12 per million are still running well below the out of control US at around 200, so we should have a good chance at controlling it again (if we get quarantining down pat) without wiping out the nascent economic recovery.
Fourth, Chinese economic data traced out a Deep V recovery in in the June quarter highlighting that if the virus is controlled then with stimulus measures growth can rebound quickly. China is leading developed countries by around two to three months in terms of the economic impact from coronavirus.
Fifth, President Trump has reportedly indicated to aides that he does not want to further escalate tensions with China. Maybe he believes that with his approval rating showing signs of bottoming around 42% and within its usual range he still has a chance in November without having to “wag the dog”. Then again, this might change again next week.
Sixth, the ongoing downtrend in the “safe haven” US dollar and rising commodity prices (with metal prices back to their pre-coronavirus levels) is normally a sign of global reflation and recovery.
Finally, easy monetary and fiscal policy is continuing to support markets in contrast to the situation when the first wave started in developed countries in late February.
Hang on for the Deep V
Given these conflicting forces, our base case remains for the economic recovery to continue but the Deep V rebound evident in much recent data to give way to a slower bumpier recovery going forward.
Shares are still vulnerable to a further correction or consolidation, with renewed lockdowns and the US presidential election being the main risks. But the positives outlined above along with still record amounts of cash on the sidelines, cautious investor sentiment should keep any volatility to being a correction which ultimately gives way to a resumption of the rising trend.
Australian employment numbers
Employment bounced back in Australia into June, but unemployment remains very high. The good news is that employment rose by a stronger than expected 210,800 in June, with the result that about a quarter of the jobs lost into May have been regained.
However, workforce participation rose as some of those who gave up looking for work started to look for jobs again (possibly in order to retain JobSeeker as the mutual obligation to look for a job was reinstated last month) and this pushed unemployment up to 7.4%. Whichever way we look at it unemployment is very high:
- the 7.4% official rate is the highest it’s been since 1998;
- if we adjust the unemployment rate for those who are employed but are working zero hours (as a proxy for the impact JobKeeper has had in supressing measured unemployment) and for those who have left the workforce since March the “effective” unemployment rate is very high at around 11.3%, albeit its down from around 13.9% in May and 14.8% in April; and
- labour underutilisation is very high at 19.1%, reflecting unemployment of 7.4% and underemployment of 11.7%.
Only a quarter of jobs lost have so far been regained, weekly payroll jobs data suggests so slowing in jobs into late June (although it has a tendency to subsequently get revised up), unemployment remains very high and the resurgence of the coronavirus cases in Australia with Melbourne’s lockdown threatens further progress in reducing unemployment.
All of which suggests that effective unemployment will be still be very high (maybe around 10% at best) at the end of September when JobKeeper and other supports are scheduled to expire highlighting the need for government support to be extended. The Federal Government’s $2bn spending on additional subsidies for apprentices and vocational training is part of this.
Business confidence… without investment
In other data releases business confidence rebounded in June but may be yet to reflect the resurgence of coronavirus cases more recently in contrast to consumer confidence for July which has retraced some its gains since April in response. It’s worth noting that while businesses were feeling happier in June, they were still indicating a reluctance to invest. Meanwhile, new home sales surged in June helped by HomeBuilder but this only partly reversed the record lows of recent months.
On housing demand – data for permanent and long-term population flows for May confirmed that net immigration has likely plunged to near zero from around 240,000pa and population growth is likely heading to its slowest pace since WW1. This would suggest a hit to underlying dwelling demand of around 80,000 dwellings and is another factor likely to depress house prices for some time to come.
Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital