Financial markets have rallied since April, with investors growing more confident that economies will turn around quickly from the fallout caused by the pandemic. Their optimism has increased in recent weeks as various countries have started to ease lock-down restrictions and tentative signs of stabilisation have emerged. Daily activity trackers from the likes of Google and Apple show most developed countries edging towards normality, halving the declines suffered during their March and April lows. China is back to January levels, though the country’s unique policy circumstances (regarding lock-down and stimulus) mean it might not be a template for elsewhere.

Huge job losses will inevitably have an impact on consumption, which is at present being mitigated by massive fiscal stimulus. Indeed, fiscal deficits are off the charts: in the US, the deficit is expected to reach US $4 trillion this year (20% of GDP), without even taking into account the various spending programmes winding their way through Congress. 90% per cent of that increase is being financed by the US Federal Reserve, which has become the ATM of the US Treasury.

This should push the US “shadow” rate (which takes into account the impact of its unconventional easing) below the previous trough of -4.7% in real terms by the year end, down from the current -3.3% (yes, there is a negative sign at the beginning of those numbers!).

 

Read the full Q3 2020 Macro here.

 

 

 

 

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