Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
Will COVID-19 vaccines and treatments deliver?
– Peer-reviewed clinical trial data for COVID-19 vaccines not yet published
– Lots of very strong growth data around the world for quarter three as it anticipates a rebound
– Similarly, Australian labour force data are strong pointing to a positive start to 2021
The Big Picture
Much of 2020 has been spent worrying about how the US elections might go and when coronavirus vaccines might be available. The light at the end of the tunnel is now visible but it’s flickering.
Except for Trump, the world acknowledges that Joe Biden will assume office at his inauguration in January. The handover got a bit nasty at times but Biden’s team is now getting access to White House briefings as is normal.
But the election is far from over. The lower house (house of Representatives) is certainly going to remain controlled by the Democrats. The Senate, however, has two undecided seats – both in Georgia. Each state allows for different election procedures and Georgia’s requires a minimum 50% count for the winner. As this figure was not achieved for either seat, partly because of the number of people standing, both seats are up for grabs on January 5th 2021 in so-called run-off elections.
Georgia is traditionally held by Republicans but nothing is normal these days. If both seats go to the Democrats, the Vice President gets the deciding vote in a 50-50 Senate. If either or both are retained by the Republicans, the Senate remains held by the Republicans and Congress is ‘split’, as it has been for some time.
Markets appeared to like the idea of a split Congress as it makes many of the more extreme Democratic policies unlikely to get through into law. In particular, it means the big tax hikes favoured by Biden-Harris won’t get through.
On the downside, a split Congress means that the much needed COVID stimulus package will struggle to get through in any meaningful size.
As in turns out, in the days and weeks following the announcement of a Biden presidency, three different companies announced (by press release) the efficacy rates of their vaccines. Normally people wait for peer-reviewed academic journals to release the results. So, are we jumping the gun?
In a combined election-vaccine euphoria, markets here and around the world charged up in November at a pace not seen since the aftermath of the 1987 stock market crash!
The clinical trials have been running for months with tens of thousands of participants. However, for any one vaccine, such as Moderna’s, the number of cases being used in the efficacy (or effectiveness) calculation is quite small.
There are always two groups of participants – one that gets the actual vaccine, and one that get a placebo (or sugar pill) as a control. Since no one knows who might contract the virus a wide net was cast with 15,000 in each group. It turns out that only 90 people in the placebo group contracted the virus. On the other hand, 5 in the ‘treatment’ group contracted the virus. The efficacy rate of 95% is calculated as (90-5)/90 being the relative gain over the base.
One of the things that causes us some concern is that the rate of infection (90/15,000 = 0.6%) in the placebo group is very much lower than around the 4% witnessed so far in the USA in the general population. Obvious factors potentially explaining the difference include the length of the trial compared to the period the virus has actually been circulating. Less obvious factors might be that the sample might have been accidentally skewed towards regions where lock-downs were effective.
Also, as participation is voluntary, what type of people signed up for the trials? Are they more likely to have socially distanced than the rest? It takes time and effort – not to mention some risk of side effects – to participate in any clinical trial. Participation might have been skewed towards more public-spirited individuals – the sort of people who are motivated to consider the welfare of others. The trials attempt to balance a study for gender, age and other pertinent factors but public spirit is not an easy variable for which to condition.
Another factor coming to light was that the AstraZeneca study included an accidentally-allocated dosage using only half a dose in the first of two shots. This group of less than 3,000 participants showed a 90% efficacy in a group of only under 55’s but 62% in the sample without the mistake – including older people who are thought to be more at risk. We have not seen splits by age in the samples from other companies.
Obviously, protecting someone who might be less affected is less important than saving the vulnerable. Another factor we are considering is that people, when vaccinated, might feel ‘safe’ and no longer socially distance, etc. Therefore, after the vaccines are distributed, infection rates might increase and efficacy rates could fall.
Dr Anthony Fauci, the main medical adviser in the US, stated on 29th November that he expected ‘wave upon wave’ of outbreaks following Thanksgiving (and presumably Christmas) because of families and friends getting together for the holidays.
Fauci also said there is unlikely to be enough vaccine to get even front-line health workers protected by the end of January. When will senior citizens get their turns? It is also largely unknown how long immunity from the vaccines will last.
Renewed lock-downs in the US, the UK and other places will have ramifications for growth in quarter four (Q4) and Q1. It appears from causal observation of news reports around the world that Australia is dealing with the virus better than in many regions.
So, while we join others in applauding the efforts of scientists and medics involved in this vital work, and we rejoice in the success found to date, we feel that the markets have priced in a best-case scenario. Perhaps exhaustion after dealing with markets over 2020 needed some respite.
Although the world is winning the fight against COVID-19, we don’t think it will be plain sailing in 2021. There may well be second dips in economic growth and more volatility in markets.
So far, we have noted big bounce-backs in many economies after the relaxation of behaviours following the first lock-down. For Q3 the following quarter-on-quarter economic growth data have so far been released: US 7.4%; China 2.7%; Japan 5.0%; Singapore 9.2%, etc. These are massive numbers compared to historical averages because Q2 was so bad! Australia’s results will be posted in the first week of December.
Not all news has been good. The UK which didn’t handle the virus well at the start and is just about to come out of its second lock-down, is expected by the government to grow in 2020 by the worst growth in 300 years! JP Morgan, a leading US bank, is predicting US growth in Q1 will be negative.
At home, the Federal and State governments, together with the Reserve Bank of Australia (RBA), have dealt well with the situation at hand. Current Infection rates are very low by international standards and a sensible approach to balancing restrictions with growing the economy is in place.
Our latest labour force data witnessed the unemployment rate at 7.0% when 7.2% was expected and 178,800 jobs were created when a fall was expected. The RBA expects the unemployment rate to have fallen to 6% by the end of 2022 and growth for 2020/21 to be 6%.
In Australia, we do have additional headwinds facing us in 2021. The relations between China and Australia have worsened. Shiploads of coal imports are being held up in Chinese ports due to seemingly questionable objections. And China imposed tariffs on wine imports of around 200% as an anti-dumping measure. An industry spokesman stated margins on wine exports to China are high by comparison to other countries. It has been reported that copper and barley might be targeted next.
Our medium- to long-run view of the economy and markets remains strong. We do find the ASX 200 and the S&P 500 to be a bit expensive in the short-term and this may in part have explained a weaker market in the last few days of November. Because of this view, and the health and political headwinds, we do not think that volatility will stay low throughout the first half of 2021. We expect some bumps but nothing too bad!
The ASX 200 rose by 10% over November after the index had given up about 2% in the last three trading days. There were major gains in Energy (28%), Financials (15%), Telcos (13%), Property (13%) and Industrials (12%). The Consumer Staples sector (-1%) actually went backwards!
We had the market heavily over-priced on the last Wednesday of November but the slight sell-off in the next three days does not prove anything. Markets are always being bombarded by news and the AstraZeneca flaws in their data being exposed could have been the reason.
The S&P 500 (+11%) was on track to have the biggest capital gains in a month since the recovery from the 1987 crash – until there was a slight sell off in the last few days of November.
Most other major international indexes followed suit. Markets rose sharply after the lock-down impact in March of this year. However, at that time, it was easy to argue that, with incomplete information, markets had just sold off by too much. There is no widely accepted suggestion by commentators that markets were very cheap in October. So, from where did the 12-plus percentage rallies come?
We think a large part of November’s gain was due to a euphoric response to ‘Trump gone’ and ‘vaccines here’. While the former is actually true the latter is far from having been confirmed using standard due process. We think any negative news on the vaccine front could give back quite a bit from those gains.
Bonds and Interest Rates
The Reserve Bank of Australia (RBA) cut its interest rate to 0.10% from 0.25% in November. It also announced it will continue to attempt to anchor the three-year rate at 0.1% and will spend up to $100bn on keeping longer term rates lower.
The US Federal Reserve appears to be done on its conventional policy initiatives. But it is also talking about possibly doing more to flatten the yield curve to approximately where it was before the election fever started.
The prices of oil, copper and iron ore rose sharply in November. Gold prices fell.
Our dollar against the $US strengthened while the VIX volatility, or fear index, fell sharply to only just above normal levels.
In an historic move, the RBA cut its overnight interest rate to 0.1% from 0.25% early in November. It is extremely doubtful that they will move it any lower but the RBA did announce a $100bn programme to keep rates lower at longer rates – with terms over 5 years.
With the December meeting too close to the November cut to expect more central bank activity and no RBA board meeting is to be held in January, we expect little news from the Bank before February at the earliest. Their work has largely been done – and done well.
The unemployment rate climbed by one notch in each of the last two months – from 6.8% to 7.0%. However, there were 178,800 new jobs created in October and the participation rate improved to 65.4% when only 64.7% was expected. This rate suggests workers are being encouraged to enter the workforce in the hope of finding work.
China economic data are just fine. The Purchasing Managers Index (PMI) for manufacturing came in at a very respectable 51.4 indicating expansion over contraction. Industrial output, at 6.9%, beat the expectation of 6.4% but retail sales were a miss at 4.3% against an expected 4.9%.
A potential new free-trade zone, RCEP, based in Asia has been signed by a number of nations including China, Japan and Australia but not the US or India. China has been flexing its trade muscles – possibly having been aggravated by the dealings with Trump’s tariffs over the last couple of years.
A number of ships carrying Australian coal are being held up in Chinese ports for what seem like flimsy reasons. At the end of November, China slapped on massive tariffs for Australian wine imports because it claims we were ‘dumping’ wine at artificially low prices. Copper and barley are apparently in the cross-hairs.
With Trump all but gone and Biden the new kid on the block, China might be starting a global confrontation over trade before Biden gets comfortable in the White House, we maintain a watching brief.
The presidential election was still being contested by Trump well after the media called Biden as the winner. There are reports that Trump might be considering a second term in office after Biden, as is allowed under US law.
Biden will probably be constrained by a split Congress so the actual changes in policy will be a lot less than that suggested by the election campaign.
Since Biden has stated that he will take action on the coronavirus from day one, he has to do something. But vaccine development has all but been done under Trump – even the planned distribution of the vaccines and the building of manufacturing plants.
It does seem that the World Health Organisation is disputing the clinical results of four treatments for very sick people rather than prevention of all by vaccines. The only difference Biden can try and make is a change in attitude towards the wearing of masks and social distancing. If he tries to shut down the US economy by too much at least the 48% of people who voted for Trump will have a lot to say.
The latest jobs data in the US were quite strong. There were 638,000 new jobs created with the unemployment rate falling to 6.9% from 7.9% over the month when 7.7% had been expected. The ISM index, which is similar to a PMI (a measure of the relative strength in business demand), jumped from a big 55.4 to a massive 59.1. However, retail sales did miss as 0.3% against an expected 0.5%.
According to the government, the UK is now facing the worst growth rate since George I was on the throne three hundred years ago! And Brexit is far from complete with the due date for the completion of a deal being New Year’s Eve 2020.
Various EU countries are flipping into and out of lock-downs. Europe does not look like a good story for growth in 2021.
Rest of the World
India has just announced a $US20bn stimulus package following on the heels of a $US27bn jobs and manufacturing package.
Singapore reported a good Q3 growth figure and growth is actually up 5.8% over the corresponding quarter in the year before. Japan has also bounced back with a 5% growth in Q3. Its industrial output was also up – by 3.8% against an expected 2.1%.
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