The COVID-19 Economy -- Initial Data, Policy Implications

Brexit and Congressional dramas concerning fiscal policy in the United States dominate headlines and have been roiling stock markets all week. The activity has consistently pushed both Brexit and Trade policy to the top of our daily PolicyScope momentum charts for the last few days given the overlap between Brexit and Trade policy issues.

So when COVID-19 policy pushed forward to second place today, it sparked our interest at BCMstrategy, Inc.

The data release from the OECD today regarding unemployment rates without question is the most strategically significant development today. The data provide the foundation for enhanced scenario analysis and policy trend projection based on concrete facts. No crystal ball needed.

Today's OECD Unemployment Data Release

For the most part, unemployment rates have been steadily declining among advanced economies in the OECD after peaking in late spring 2020.

Conceptually, the results are intuitive. Countries with automatic stabilizers and generous welfare states in the EuroArea experienced less volatility regarding unemployment rates. Massive fiscal and monetary policy support programs together with adaptive behavior by businesses throughout the summer contributed to consistent and large month-on-month declines in aggregate unemployment rates in North America. However, the small but steady upticks in unemployment rates within the EuroArea despite major economic support packages both at the European Union and Member State levels are troubling.

If we assume that the positive rate of change for unemployment rates remain the same on a month-to-month basis (admittedly an optimistic assumption), simple math tells us -- stunningly -- that by year-end 2020 unemployment rates could return roughly back to January 2020 levels:

Indeed, today's updated economic projections from the European Central Bank shows unemployment in the EuroArea peaking during 2021 at 9.5%....well below June's anticipated 10.1% level. This optimism regarding unemployment rates is consistent with the data released by the OECD today.

Capital Market Implications

In a normal world, steadily decreasing unemployment rates would generate a bounce for stock markets (particularly in the United States). But the stock market today continues to exhibit downward pressure despite this good news.

We believe the reason the reason is because stock markets currently are driven more by public policy developments than by traditional data. Consider the relationship between our patented Policy Risk Indicators overlaid by NASDAQ closing prices for the month of September:

Overall, the pattern of activity broadly tracks between the markets and pubic policy activity. Policymakers act to support the economy, markets celebrate. Animated, it looks like this:

Our Policy Risk Time Series data is global. It reflects activity across a broad range of advanced economies. If we narrow the focus to only U.S. developments and control for policy directionality, the correlations and covariances in the chart above become clearer. Efforts last week by the U.S. Treasury and the Speaker of the House to find a compromise concerning another fiscal stimulus package delivered both increased policy activity and increased market optimism. When those initiatives foundered this week through the introduction of a modest fiscal package in the Senate paired with agreement to avoid a government shut down and fund the government through year-end 2020, downward pressure gathered momentum despite improving economic data.

The prospect of decreased government support for the economy might make sense when viewed from the perspective of dropping unemployment rates, but it would negatively impact market expectations about insulation from potential future economic stresses during 3Q and 4Q 2020.

Implications: Data-Driven Scenarios & Trend Projections

Understanding the relationship between market and policy reaction functions requires far deeper dives into our data than this blog post permits. The key point at present is to determine how a little-noticed economic data point released today and spotted immediately by our PolicyScope Platform can impact policy near-term public policy trajectories.

The informational advantages for capital market participants seeking alpha -- or just seeking to hedge their market risks -- can be significant when the rest of the market has not noticed a data release. PolicyScope Platform users -- and our PolicyScope Risk Monitor readers -- will be able to devise more accurate data-driven scenario analysis to fine-tune their assessment of risk exposures and alpha generation opportunities.

Policymakers will have had advance access to the OECD data. Lower unemployment rates create concrete facts from which policymakers make decisions. Among other things, an improving unemployment rate

  • decreases incentives for policymakers to release more fiscal stimulus, particularly when that fiscal stimulus must be financed by increased sovereign debt issuance;

  • decreases default risks on credit card, mortgage and small business loans;

  • increases the capacity for consumers to purchase products in the economy, placing upward pressure first on retail sales and ultimately both purchasing manager indices and inflation rates.

Economic averages also, by definition, smooth over nuances within data sets. The pandemic famously is delivering an uneven impact. Economic disruption is hitting hardest those portions of the economy and populations often least able to absorb the impact. Even if unemployment rates do revert back to January 2020 levels, it does not mean that the economy will be back to normal and it does not mean that the pandemic's impact on the economy will be over.

More robust scenario analysis from this data would require understanding whether improved unemployment rates are the result of low skilled hospitality sector workers finding new jobs in food service delivery or retail sales sub-segments that are booming (e.g., home improvement) or whether, instead, the improvements are the result of decreased unemployment claims associated with reliance on pandemic-era emergency support payments from governments.

But if you did not know that unemployment rates on average were improving significantly in the United States and Canada, you would not know to explore these (and other) scenarios.

This is how our patented PolicyScope Platform delivers enhanced cognition.

Our users read smarter and faster. They connect the dots better and deliver accelerated strategic thinking because the patented platform delivers to them daily a finely curated set of data and source content relevant to their specific interests.


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