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Investment Institute
Macroeconomic Research

It ain’t over ‘til it’s over

  • 16 November 2020 (5 min read)

Key points

  • The sanitary situation in the US is concerning and the good news on the vaccine won’t likely change the macro trajectory before mid-2021. In the meantime, policy-makers will be under heightened pressure. The ECB is moving towards implicit yield control but in some EMs the room for accommodation has disappeared. It would be nice to get some closure on the Brexit saga, but the negotiations may have to spill over next week. 

After the near-exclusive focus on the US elections, attention has returned to the sanitary situation. News on this front are not positive in the US, pointing at more severe restriction to activity in the weeks ahead. This, together with the continuation of the lockdowns in many European countries, suggests that the good news on a vaccine will not alter the trajectory of GDP growth in most developed nations before mid-2021.

During the first wave in the US Democrats and Republicans had managed to bridge their difference and come up with a huge fiscal stimulus. So far in this second wave, no progress has been done. We are convinced help will come, but more in a reactive than in a pre-emptive way, and probably with less magnitude.

Meanwhile, in Europe the ECB is becoming ever clearer on its pandemic-fighting strategy. Christine Lagarde speech at the central bank’s annual conference contained more than a hint at implicit yield control. With its insistence on fighting “crowding out”, the ECB sent the signal it would effectively cap sovereign interest rates even when the supply of sovereign paper rises to make space for the fiscal stimulus. This implies that it will need all the flexibility of the PEPP – which we expect to see extended in December - to achieve this.

But policy accommodation is no longer possible everywhere. The market expects a huge rate hike in Turkey this week (marginally south of 500 basis points, on top of the 200 basis points delivered in September). Their situation is significantly less problematic than Turkey’s but India and to a lesser extent Mexico are also dealing with a resurgence in inflation which will impair their capacity to provide additional stimulus. This is not necessarily conducive to systemic crises in EM (in most cases –Turkey being a major exception - their international financial position is solid) but is an issue for global demand in this second wave.

This week is expected to bring closure on the “Brexit saga” but negotiations may have to continue into next week. We don’t think the dismissal of two leading “Vote Leave” advisors from the Prime Minister’s office necessarily reflects a change of stance on this issue from Boris Johnson. He still needs some concessions to sell the agreement to the most radical wing of his party. We remain optimistic, but it will be a tense game until the very end. 

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