September 21, 2020
Fiscal stimulus: Some of the high frequency US economic data (credit card spending, mobility etc) began to decelerate toward the end of August, which many associated with a lack of fiscal support/looming fiscal cliff. Some of the official data confirmed a loss of momentum, but downshifting from Q2 annualized growth of ~35% was expected. The question is what level are we trending toward and my guess is something that’s still quite strong. The loss in high frequency data momentum toward the end of August has already corrected above trend despite a lack of fiscal support and low expectations for relief anytime soon. Why? The US savings rate extremely elevated going into the $3T Cares Act and even more elevated now. Economists estimate an incremental $1T in fiscal stimulus would add ~1.5% GDP growth over the next 6 quarters…and that’s on top of Q4 estimates in the ~7% range. At this point, any potential material downshift in consumption would have come later in Q4. And the failure to deliver a fiscal relief package now is being conflated with the low-probability risk of Congress becoming paralyzed in the wake of contested election results.
Monetary stimulus: The pullback in equities has also been attributed to monetary policy disappointment following last week’s FOMC meeting. It’s probably better defined as a Fed credibility concern. Whatever ‘forward guidance’ we received at last week’s meeting was impressive with the next rate hike dependent on achieving: 1) actual inflation getting to 2%; 2) a forecast for inflation to sustain levels above 2%; 3) unemployment running at the Fed’s maximum rate, which is probably around 4%. The credibility issue arises in the summary of economic projections, where no one on the committee projects inflation to rise above 2.1% for next 3 years. On the surface it seems like they should be doing something incremental to get there. But even though the Fed didn’t announce any new measures, it’s still adding stimulus through balance sheet expansion (buying Treasuries/mortgages) at $120B monthly pace. That creates scarcity, which drives prices up and yields down.