Pandemic Receding, Investors Review The Fallout

As the global pandemic recedes into the rearview mirror throughout the core economies, with China being the farthest ahead, markets are now starting to look at other things. Whether its a U.S. labor market that will not return to what it was in the last several years, or China convinced the U.S. wants some version of a Cold War with them and is not afraid to take it out on Hong Kong, economic fundamentals and geopolitics are coming into focus again.

“If we are having this conversation in July about the end of the pandemic, and I’m still working from my kitchen, then it means we are in a worse space than any of us wants to be,” says Patrick B. Healey, founder and president of Caliber Financial Partners in Jersey City.

U.S.: Help Wanted

Companies that are looking to re-open are realizing that record high unemployment insurance payouts means employees are happy sitting this summer out.

Second quarter unemployment and participation rates of 17.5% and 59.4%, respectively, should stabilize in the third quarter. Excess layoffs should lead to an overshoot of re-hiring in the months ahead, and a short-term burst in productivity since layoffs are concentrated in lower-productivity service sectors.

Barclays estimates that second quarter GDP contracted by more than 42% from the previous one.

April data suggests the trough was reached. So that’s a positive. Incoming data for May point to some modest sequential improvement. Initial jobless claims point to a slowing in the rate of job loss and the index of consumer sentiment from the University of Michigan ticked modestly higher last week. The Markit PMI release for May showed improvement in both services and manufacturing components, as well, though albeit from a dismal starting point.

Based on what economists see in the May numbers, as limited as it may be, it still suggests that the economy will be in recovery mode in the second half of the year, starting in July.

China Relief & Uncertainty

China’s annual National People’s Congress, which began on may 22, wraps up this week with the formalities. However, we already know a thing or two from the NPC meet.

One, the stimulus package was not blockbuster.

Two, China’s reformers, led by Liu He, are not in charge. After Hong Kong shelved a controversial extradition bill that led to months upon months of violent protest there, Beijing wants to unify criminal justice laws as an end-around the extradition bill. In other words, China is moving faster than anticipated in bringing Hong Kong into the fold of mainland China politics, something not scheduled until the 2030s.

“It seems like China has messed up their relationship with most of the developed economies around the world because of the pandemic,” says Touchstone global market strategist Crit Thomas. “I can see geopolitics come up again given the saber rattling from Trump.”

On the economic front, the total fiscal package for 2020 equates to 9.5% of GDP, according to Barclays’ calculations. Market consensus had it at 10%. Shanghai stocks were a bit of a bore on Monday, trading flat.

“Compared to Covid-19, geopolitics are a more known unknown which markets regularly deal with,” says Christian Keller, an economist for Barclays in London. “The geopolitical uncertainty seems to be increasing again as the pandemic uncertainty recedes.”

The biggest risk to the recovery would be for U.S.-China tensions to coincide with unexpected setbacks as economies reopen. That, plus a presidential election set the table for a volatile second half in the markets.

India: Not Negative!

Prime Minister Narendra Modi surprised markets in March when he slammed the breaks on his economy and put everyone in quarantine. It was a haphazard start, with migrant workers stranded as train stations were ordered to only take certain numbers of passengers. It was a mess.

India’s economy will shrink, but at least it’s not negative (yet).

India’s first quarter GDP growth is seen slowing to about 2% year over year from 4.7% in the fourth. The initial months of the first quarter saw the economy continuing to build momentum, with some high frequency indicators showing early signs of recovery after poor growth in the second half of 2019. Lockdowns of course killed all that.

“April and May have seen a near washout of activity in large parts of the economy,” says Rahul Bajoria, chief economist of Barclays in India. He is sticking with his projection of 0% GDP growth for calendar year 2020...with downside risks.

“Economic fatigue hasn’t hit India yet, but there’s a question of running into issues like starvation coming up for the last week or two,” says Piya Sachdeva, an economist for Schroders. “Given the transmission rates of the virus now, I think in many countries it is worth opening up now,” she says. “It’s going to be a U-shaped recovery,” she says, then hedges: “But if you draw it out, it might not look like one.”