The number of countries lifting their COVID-19 lockdowns is increasing, and sentiment indicators are picking up. Levels of mobility are accelerating. This should help the real economy to spring back at a faster pace than was originally envisaged. Data appears to be bottoming and markets are expecting it to improve at a stronger pace going forward.
The global caseload for the Coronavirus is now in excess of 9 million people and the total number of fatalities is closing in on half a million people. Currently the focus is clearly on the Americas, with new cases rising in both Latin America and the United States.
In Europe, a spike in cases led to a new lockdown for around 370,000 inhabitants of the Gütersloh district in north-west Germany. This news, along with an increase in the estimate of the effective reproduction number for Germany produced by the Robert Koch Institute (to 2.88), has attracted considerable attention.
In the US, the number of the new daily cases is rising, driven by the big states in the south and west, such as Florida, Texas and California. It is important to keep in mind that deaths are still on a declining trajectory but active COVID-19 hospitalisations have risen in some states to levels last seen in mid-May. These developments have understandably raised fears of a second wave although Dr. Michael Osterholm, a prominent US epidemiologist, framed the problem in a different (and arguably even more alarming) way: “I don’t think we’re going to see one, two and three waves — I think we’re just going to see one very, very difficult forest fire of cases.”
More broadly, the World Health Organisation warned on Friday that “the pandemic is entering a dangerous phase, with people tired of staying home and countries eager to reopen economies, but with COVID-19 activity still spreading fast and much of the world’s population still susceptible”.
Turning to the macroeconomic data, the latest set of Purchasing Manager Indices (PMI) were published this week (see Exhibit 1 below). These data remain a key signpost of economic activity for investors – more timely than the official data on activity. Eurozone data were collected between the 12 – 22 June and the numbers continue to present a puzzle. In theory, companies are asked whether output is up or down on the month, and a net balance of 50 on the survey implies that an equal proportion of companies are reporting moves in output in each direction.
If we consider the recent history of the Eurozone PMI services activity balance then we are invited to conclude that activity continued to contract between May and June, after severe contractions in March, April and May. At best, one could describe the trajectory of the recovery as L-shaped. This conclusion does not tally with basic intuition: with economies starting to recover it seems hard to believe that activity was still falling between May and June. Indeed, a whole suite of indicators which capture economic and social mobility point to a gradual return to normality. We suspect that many investors have chosen to focus instead on the overall level of the PMI – effectively ignoring how the data are constructed and the relevance of the 50 “no change” point – whereupon the significant bounce between May and June is taken as evidence of a V-shaped recovery. The truth we believe lies somewhere in between these two alphabetical extremes.
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