Powell,Fauciandreopeningconundrum

There are some ambivalent news items on the anvil today mainly from the US. The White House health advisor Dr Anthony Fauci said on Tuesday during a hearing with senators that the US is “not in total control” of the pandemic and the daily new cases could  surpass 100,000 new infections per day if the outbreak continues on the current trend. The current rate is 40,000 new cases every day, up from 22,800 in mid-May. He added that “we are going in the wrong direction if you look at the curve of the new cases”. This came in response to the senator’s question as to whether the US is heading in the right direction in terms of controlling the outbreak. Fauci also pointed out that some states might have opened too early without taking the precautions mandated by Federal government. People in some places have also taken an “all or nothing” approach, throwing caution to the wind, and resulting in the number spike.

Fed Chief Powell on the other hand said that there is “extraordinary uncertainty” as to the economic outlook but some macroeconomic figures are pointing in the right direction.

To add to the heady mix, US President Trump tweeted that “he is becoming more and more angry at China as he watches the tremendous damage the corona virus has done to the US”. There is a possibility that as the election fever ramps up there could be pressure on the incumbent government to look and act tough with China. Whether the rhetoric meets the measures on the ground is one thing but we can see a return to the pre Sino US deal times of 2019 where everyday a new statement would put the deal in jeopardy making the markets move with it. Readers would do well to remember “the deal is over” statement by White House advisor Navarro few days back, which created quite a ripple and had to be swiftly denied.

Now let us look at the implication of Dr Fauci’s statements. A second wave of virus cases not only delays the reopening of the economy but it makes the future reopening efforts much more vulnerable as there will be a lingering doubt about the return of cases every time reopening is discussed. This is where the second order effects start to come into effect. Many businesses with exposure to the virus could be resigned to its permanent nature and close for good. The employment opportunities connected with those businesses have to be re calibrated but some will be lost forever, taking along with it a portion of demand and a sliver of GDP. The point being that as the entire time line of this phenomenon stretches out, some elements become permanent in nature. The much awaited “V” gets hammered into a more supine “L”. Think of it also in terms of government finances. The job loss accentuates tax short fall and the need to perpetuate the payroll support kind of programs. We have written previously that although the scenario of how virus will impact GDP remains more or less common for different countries, how they end up financing that shortfall is bespoke for each one. Some are the privileged ones and some are not.

Domestically, the important news was the PM’s address to the nation where, among other things, he announced the extension of the free food scheme for the country’s vulnerable until November. The announcement, though, should be negative for bonds as it results in a further load on government finances, but as of now it has not yet played out as such. The 10 year benchmark bond trades at 5.87 against 5.88 yesterday. As the month has ended it would be good to see the foreign flow figures, against the outflow in March, April and May. June showed inflows, with the total inflow for the month at 16370 Cr INR.