04 Aug July 24, 2020
Europe
The EU member nations agreed on a 1.750 trillion euro fiscal stimulus package to be funded by the EU emergency fund and the EU budget. These funds will be contributed by all member states, but disbursements will be directed more toward the southern periphery nations that have had the biggest impact from the COVID-19 pandemic. To clinch this deal Merkel and Macron had to offer some future rebates on budget contributions to northern core nations and significantly weaken requirements around protecting democratic institutions in order to appease some eastern nations. Italian bond spreads tightened significantly relative to Bunds.
Our Take: This deal represents a major step toward a fiscal union in the EU. While this move may reduce the near-term risk of fiscal stress in the periphery, it could have long-term impacts on domestic politics in core nations if fiscal transfers are not accompanied by meaningful structural reforms in the periphery.
China
The Trump administration demanded that the Chinese government close its consulate in Houston and gave diplomats there 72 hours to leave the U.S. The administration said that the Houston consulate was being used to support espionage and intellectual property theft. The Chinese government responded by ordering the U.S. consulate in Chengdu to close. Chinese stocks dropped significantly and U.S. stocks pulled back while Treasury yields fell.
Our Take: These moves bring the U.S. and Chinese governments into even more open political conflict. Such conflict makes the resolution of trade disputes even more difficult and will be a headwind to a recovery in global growth.
Jobless Claims
Initial jobless claims rose to 1.416 million from 1.3 million for the week ending July 18. Continuing claims (two-week lag) fell from 17.338 million to 16.197 million. The total of individuals receiving pandemic unemployment assistance (three-week lag) fell from 32 million to 30.5 million.
Our Take: The increase in weekly jobless claims was likely in part due to renewed shutdowns due to increased virus activity. The jobless claim numbers are a little suspect as there are still people filing from the early days of the pandemic who are finally able to get through the overwhelmed state systems. Economists are closely watching the total receiving pandemic unemployment assistance, which includes workers not eligible for traditional unemployment insurance. It will be two weeks until these numbers can confirm the recent slowdown in employment, but that seems to be what is currently happening.
Municipals
New Jersey Governor Phil Murphy signed legislation that allows for nearly $10 billion in borrowing to close part of the state’s budget gap. New Jersey now has the ability for borrowed funds to be used during the rest of fiscal year 2020 and for fiscal year 2021, which will start on September 30.
Our Take: New Jersey, like many other states, continues to struggle with lower-than-expected revenue collections due to the pandemic. The legislation allows for the borrowing to be used if needed. While additional borrowing costs are not ideal, the ability to borrow allows the state to cover short-term shortfalls.
All expressions of opinions are subject to change without notice in reaction to shifting market conditions. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities and should not be relied on as financial advice.