In search of the bottom in the Covid-19 crisis

Wednesday 25 March 2020

Markets are leading the real economic cycle and therefore they will bottom before the end of the pandemic. However, they will calm down and be reassured on the path forward when they can anchor expectations on three points:

1. The cyclical pattern of the pandemic, or when there is some sign of an improvement on the speed of the contagion. This depends on the “time” variable (the extension of the crisis period) and on the mobilisation efforts (the containment measures put in force in the different states). Early containment with strong measures such the ones applied in China and most recently in the main Western countries could help limit the spread of the virus;

2. The ‘whatever is necessary’ tactics of fiscal and monetary authorities, and whether or not monetary policies and fiscal measures are considered credible and effective to ease financial conditions for the corporate sector or to provide adequate resources to the household sector to face a period of higher unemployment due to the shutdown of economic activity;

3. The short end of the credit curve, after recent dislocations, and core bonds yields, which have started to rise since the fiscal measures have been announced, discounting higher future debt.

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In this unprecedented time of high uncertainty from a sanitary and economic perspective, the different drivers at play are moving in different directions. These forces make the exercise of GDP forecasting quite tricky and not particularly helpful for the time being.

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Latest From the Markets : 31st March 2020

China has just published its PMIs (Purchasing Managers Indices) for March. The good news is that both indices are around 52, i.e. above the threshold of 50, which separates expansion from contraction, showing that the recovery in the production of goods and services in China is underway. The data should be considered carefully, however, because a return to production in March may well be counterbalanced by the slowdown in global demand elsewhere, so we cannot extrapolate a positive trend in the near future. However, the data is above the forecasts, which expected to see the PMI manufacturing index at 45, so that is good news.